Invest Hot Topix

The attached Hot Topix highlights the potential pitfalls and opportunities going into 2015. The analysis is very basic and based on the most likely expectations for now. These expectations change daily in a dynamic world. For instance, last year many analyst would have expected U.S. interest rates to go up during the beginning of 2015 but after the first two weeks of trading in the new year this certainty looks more and more unlikely, with some prominent market commentators now only expecting U.S. rates to go up in 2016. It is therefore important to keep track of these market expectations by following the daily market overview.

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“South African investors needs to be very aware of what is happening around the world as this should likely have a bigger effect on our markets than events taking place in South Africa. Rising interest rates in the developed world, a collapse of the Eurozone or a slower growing China might result in a significant devaluation of the rand as well as local stock market. If you are not planning to diversify offshore, monitoring the global markets is important as it could be a reliable indicator on how much risk one should take on local investments”

“The big expectation for 2015 is that the U.S. dollar should strengthen (which would mean a weaker rand for local investors) with interest rates expected to rise in the U.S. With higher interest rates in the U.S., investors are more likely to invest in U.S. assets, which traditionally carry less risk than emerging market or European assets”

Summary:
Analysts and market commentators around the world seem to be very optimistic about 2015 and there is a hope for strong U.S. growth to spill over to the rest of the world. Although countries such as Russia, Nigeria and Venezuela should suffer from lower oil prices, global GDP should increase by 0.2% for every 10% drop in the oil price according to the IMF. The world produces just over 90m barrels of oil per day. At $115 a barrel, that is worth roughly $3.8 trillion a year; at $85, just $2.8 trillion. This trillion dollar saving represents a shift from producers to consumers. At $50 a barrel, this saving increases to around $2.2 trillion. Any country or group that consumes more than it produces gains from the trillion dollar transfer—importers, most of all. In addition, there is also hope that threats like Ebola and ISIS could be contained this year.
The fundamentals for successful investing will remain the same for 2015. In order to achieve higher returns, investors will need to take on more risk. However these risks can be reduced by implementing some of the following strategies:

Buy into market dips and not on the back of market rallies. When bad news hit the market during the year, use it as a buying opportunity after assessing the risks. For instance, a possible exit of Greece from the Eurozone might result in a pullback, but if Europe is able to contain this risk from spreading to Italy, Spain or Portugal, it might prove to be a good buying opportunity in a region set to gain from a stronger Dollar. Buying at lower prices will also enhance returns of asset classes which are generally expected to deliver lower returns this year.


Remain calm during Volatile times and don’t sell at lows. Like every other year, it is highly likely that we could experience a period of volatility somewhere during this year. The world has survived some serious threats over the last 10 years and it should in all likelihood survive any new threats during the year. Remain calm and stick to your investment strategy


Steer clear of overvalued investments. The general consensus in the market is that equities offer better value than government bonds. These traditionally safe investments have been severely inflated by quantitative easing programs and are therefore now seen as a higher risk investment relative to equities. For equities that look to be overvalued, such as U.S. stocks, make sure to follow the earnings of corporate companies. A good earnings season out of the U.S. might just prove U.S. stocks to be attractively valued.


Diversify. As with any other year, optimal asset allocation should prove to be an important driver of return. If you don’t have the skills for this, it is best to leave this decision in the hands of a capable multi-asset manager.


Select investments based on a risk/return analysis rather than going for the cheapest option. Cheaper investment options such as passive investments will expose clients to a great deal of risk during volatile periods as there is no manager to steer a client’s funds away from risky situations. These low cost investments are options to rather consider during periods of low volatility whereas active investment strategies can use volatility to benefit the client.


It is unlikely that 2015 will turn the average investor into a billionaire. Instead it should be seen as another opportunity to increase the long term compounding effect of your investment by avoiding losses and generating real returns. Doing this year in and year out should ultimately result in wealth creation in the long run.


Kind regards

Tersia van Nieuwenhuizen
Independent Contractor to Discovery Life
Direct: +27 21 975 3199
Fax: +27 21 975 3995
Email: tersiav@ic.discovery.co.za
URL: www.discovery.co.za

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