Diversification makes sense in very uncertain times

Every so often fear and uncertainty grips the financial markets resulting in massive sell-offs and share price volatility. Prior to the current sell-off, the previous major market slump was of course the 2008 financial crash. And going further back in time, the bursting of the Dot.com bubble at the start of the millennium was another fabled slump.

Once again, we are faced with a similar reality; this time triggered by the global Coronavirus (COVID-19) pandemic.

Social distancing, self-quarantine and in some instances nation-wide lockdowns, are some of the measures governments around the world are imposing in the fight against the virus. South Africa has not been spared: the country is also under a 21-day lockdown as declared by President Cyril Ramaphosa which began on Thursday, 26 March 2020.

Domestic and international equities have taken big hits since the start of the year, and in many countries, years of market gains have been wiped out in a matter of weeks. The rand (ZAR) has also weakened significantly, trading above R18 to the dollar post the downgrade by Moody’s of South Africa’s sovereign credit rating. This means that South African government bonds will no longer be eligible for inclusion in the World Government Bond Index (WGBI) due to their sub-investment grade (junk) status.

But what does this mean for investors, and how can we protect our portfolios through this period of uncertainty?

South African investors with exposure to assets denominated in offshore currencies have benefited from the recent record rand weakness by seeing some of their investments appreciating in rand terms - or at least losing less than the purely local investments.

For example, the Ashburton Global 1200 Equity ETF year-to-date performance at the end of March 2020 stands at 0.78%. For the same period, the Ashburton World Government Bond ETF has delivered a massive 30.19% thanks to the plunge in global bond yields as investors sought safety in bond certainty.

Having offshore equity and bond exposure in one’s portfolio is a prudent approach in times of rand weakness and to reduce exposure to just South African shares.

The Ashburton Investments offshore exchange traded funds are an excellent tool for South African investors who seek to diversify their geographical and currency exposures.

Nhlanhla Tenza