Darkest before dawn

10 May 2018
While 2017 saw relatively low volatility in global equity markets, 2018 has to date painted a different picture.

This increased volatility can be attributed to concerns over global growth, fears around the withdrawal of liquidity that has been in abundance over the last decade and less attractive valuations given the bull market observed over the last 9 years.

This is according to Graham Tucker, Manager of the Old Mutual Balanced Fund, who believes that while market volatility manifests itself in lower returns over the short term, it creates a better point of entry to the market for long-term investors.

Francois Rochen said that volatility is not synonymous of risk but – for those who truly understand it – of wealth. “Volatility is often seen as a risk by investors, but it actually presents opportunities,” says Tucker. “Periods of volatility allow for improved entry points into the market, presenting the opportunity to buy assets that you need over the long-term, at better prices.”

Tucker warns that investors don’t want to be panicking in turbulent times, when instead they could be using volatility to their advantage. “If you panicked out of the market in February or March of 2009, while equities were coming off quite sharply, you would have missed out on one of the best bull markets of our time. The key during that period was to keep a cool head, avoid panicking as a result of extreme volatility and increase your investment savings, in other words go on the offensive, not the defensive.”

Tucker adds that if an investor is concerned about volatility, then this is where a good advisor comes in; they can help navigate through the volatile times.

So considering the volatility we’re seeing in SA and globally, where should investors be looking for opportunities right now?

“In our view the outlook for the global economies remains strong. We are moving later in the investment cycle and central bankers are raising interest rates, but they remain exceptionally low by historic standard and when looking at real rates. We view these rate hikes as “good news” hikes in that the economic recovery is robust enough to allow for interest rate normalisation.”

“We’re looking for opportunities to increase our exposure to equities during this period of volatility,” says Tucker. “History clearly illustrates that, over the long term, investors require growth assets in their solution. Given our economic view, equities therefore remain a desirable investment.

“In particular, we’ve turned our attention towards the local equity market. South Africa still faces many challenges. But, the market-friendly developments we’ve seen of late, the vote of confidence given to us by Moody’s and the rapid improvement in confidence augurs well for local assets, at least in the short to medium term. After years of constant negative revisions to South Africa’s growth prospects, we believe we’re now past the point of maximum pessimism.”

However, Tucker believes that to some extent this more positive view is already reflected in asset prices. “For example, the rand was simply too strong in the first quarter and some weakness was to be expected. Therefore, we are exploring opportunities that still offer a reasonable upside return for our clients from here.”

This more positive stance on South African assets is not limited to equities. “This is where a balanced fund is a great investment vehicle as it not only offers investors the opportunity to hunt far and wide, but also introduces greater diversification,” he explains. “This results in a smoother journey for an investor, according to Tucker. “No single asset class constantly outperforms. Actively managed balanced funds provide exposure to a wider universe of assets to enhance the potential returns and allow the portfolio manager to adjust the portfolio timeously as and when required.”

Tucker concludes that we are prone to panic when it is darkest. “When investors panic, they shorten their time horizon significantly and this can have an extremely detrimental impact in the long term. Don’t let volatility rule your emotions – volatility can work in your favour when playing the long game.”