In today’s newsletter we take a look at some of the important investment decisions to consider in 2012.
The risks, the big calls, and the plan
A plan will be essential for successful investing in 2012. Investment markets are more volatile, seem to be offering lower returns, and markets and prices react to daily newsflow. This is distracting for an investor – and it can influence decisions and outcomes. The excessive noise and newsflow in 2011 has had a benefit for serious investors – they recognise that you cannot and should not react to everything. But you do need to identify what the risks are, what will matter in investment returns and what your strategy will be in dealing with these risks and market events.
The risk is not Europe it is too little capital
The risk an investor faces is not that Europe goes under, it is that they don’t meet their investment objectives, and the returns required to meet their long term needs. This was according to Guy Chennells of Old Mutual Corporate who was speaking at an Old Mutual Actuaries and Consultants (OMAC) presentation in Sandton in November. The risk is that you don’t take enough risk to realise growth.
The strategy is to have a plan
Several experts made the point at the OMAC presentation that to be a successful investor you have to have a plan and stick to it.
“When you don’t have a strategy you make the worst decisions,” commented Windall Bekker, head of the OMAC Investment Consulting Team.
“The best risk management strategy is to have a strategy,” said Rashaad Tayob of Aeon Investment Management. “If you don’t have a strategy it will be defined by the media, and that is the most dangerous strategy.”
Having said that, investors need to be able to identify what could make a difference to their investments in 2012.
What do you need to focus on in 2012?
An investor needs to always keep in mind that their investment is anchored in the future. Much of the factual information we receive relates to the past (think of unemployment and inflation figures – by the time we know these they have been part of our lives and wallets for a good few months). We do make forecasts and assumptions about the future but these are often changed in the short term – think of GDP forecasts that keep on changing.
As it exists in the future with many unknowns it becomes important to ask the right questions and to accept some mistakes along the way while getting the big calls right.
As an investor in your future what are some of the things you should be on the lookout for in 2012?
Karl Leinberger, CIO of Coronation Fund Managers mentioned four key calls to get right when looking at markets and economies. Leinberger was speaking at the final 2011 Conversations with Coronation in Johannesburg recently.
1. Recession, Stagnation, Growth?
Will this crisis period of low economic growth move into a great recession, asked Leinberger. Or are we in for anaemic growth for a long period of time? Leinberger said Coronation does not see a great recession ahead – this is not the base case – but anaemic growth is likely in the OECD countries.
Many economists and strategists share the view that Europe will move into recession, the US will grow slowly for a long time and emerging markets will grow at more respectable rates. Emerging country stock markets are likely to outperform developed stock markets, said Leinberger.
2. China – hard or soft landing?
The second thing to get right, Leinberger commented, is the question of the hard or soft landing in China.
Here in SA some of us struggle with the concept that 6% GDP growth in China is a hard landing – we would welcome 6% growth – however it remains for such a big economy a big number to get right. It’s also very important to SA, because as Leinberger pointed out, we are a commodity exporter and a hard landing in China will impact our economy.
3. Inflation or deflation?
Will these challenges lead to deflation or inflation, Leinberger questioned? This has very direct implications for investors. It changes your views and allocations towards bonds, for example. And investors need to make sure at all times that their investments are beating inflation and their capital is not being used up too quickly.
Globally and particularly in SA, Leinberger sees inflation as a more likely scenario. “Where you can – avail yourself of cheap inflation protection,” he said.
4. Will bond investors revolt against weak interest rates?
Rates in Europe and the US are extremely low – will bond investors revolt? Leinberger says this would be game changing for any economy.
The policy of low interest rates has not led to much media debate but possibly one that could be a feature of 2012. Heading into 2012, now with over three years of very low interest rates behind us – we need to ask have they worked? Have they stimulated economies and growth?
“Don’t bank on low interest rates solving any of our problems,” Leinberger says.
Chris Hart, chief investment strategist at Investment Solutions presented his views on 2012 in Johannesburg at the beginning of November. At the time the European Central Bank had just cut their interest rates from 1.5% to 1.25%. How is an interest rate of 1.5% an obstacle to growth, Hart questioned. You have got to “appreciate that interest rates are not their problem!”
The question of policy and growth versus inflation is likely to continue into 2012.
Like Leinberger and many others Hart does see inflation as a problem – rising to above 7% in 2012. With these low interest rates investors have to consider inflation, and look for inflation beating investments no matter what their age or investment goal.
Yield, growth and solvency will drive performance in 2012
For Hart – two things you want as an investor in 2012 are growth and liquidity/solvency.
You need growth because of the risk of inflation and the possibility of living a very long time, and in a world economy of debt you need to have a measure of confidence and certainty that your investment is relatively safe.
Debt is not going away
Hart said that in 2012 we need to remain aware of the bigger debt issues – “There is always the risk that the debt problems start to cascade.” Too high debt levels are unmanageable, have gone on for too long and have ignored savings that are a critical driver of the economy.
Volatility and uncertainty will continue.
Hart commented that bonds could continue to struggle in 2012 in SA. Inflation is rising and interest rates are likely to be low. Bonds and cash are usually seen as safe havens and a refuge in times of uncertainty – however locally they could dip into negative real return territory and offshore they are a “submarine” asset.
The opinion and comment in this newsletter is opinion and comment only and does not in anyway constitute financial advice. Please seek advice from a registered financial adviser for all investment and financial decisions.
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