Diversification is an important way to reduce risk when investing. The thinking is that if an investor mixes a variety of investments in his/her portfolio, on average, it will yield higher long-term returns and lower the risk of any one holding.
In this regard, we need to consider our situation as South Africans, with a rand that fairly predictably depreciates at 4%-6% p.a. over the long term – that implies a rand vs US dollar exchange rate of c. R25/$1 by 2030. When investing in rand, a high-quality global equity portfolio is a compelling proposition. JSE returns sometimes compensate for SA’s higher inflation rate (it has over 15 years), but it certainly makes sense to diversify out of just SA equities.
One also has to take SA political risk into account (although US President Donald Trump’s antics make our politics relatively more tolerable!), and again the answer is to diversify out of any one specific risk.
From a global perspective, an increasingly benign backdrop has seen world equities bounce sharply in 1Q19. Importantly, Chinese stimulus looks to be taking effect and a resolution to the terms of trade with the US could provide a further boost.
This was in part responsible for the 17% increase in the local resources sector (although there were also commodity-specific drivers) during 1Q19 and the c. 19% increase in index-heavyweight Naspers in 1Q19. This has also seen a marginally stronger rand, which started the year at R14.35/$1.
So, at this stage, it looks as if the rest of the world will be good for our stock market. And this, in turn, is positive for earnings and share prices of over half the shares on the JSE.
Nevertheless, back home it is much more complex and there is no doubt that local economic conditions are under increasing pressure.
So, as you set out to build an investment portfolio, you will need to accept one reality—there are no meaningful returns without risk! However, by diversifying, you minimise the risk of loss. While one investment might perform poorly, others may perform better over a certain period, thus reducing potential portfolio losses from concentrating all your capital under one form of investment.
Written exclusively for Moore Stephens by
Anchor Capital