Traditionally, during times of economic slowdown, crises or recessions, the world’s wealthy have run towards gold. Fuelled by fear, the belief in bullion’s power of resilience saw the precious metal spike in value during the 1970s, 1980s and, more recently, the 2008 recession. But in a world of artificial intelligence, cryptocurrencies and mobile money, the battle lines seem less clear as investors seek a safe haven for their wealth. Or are they?
The cryptocurrency buzz
Cryptocurrency fans are quick to point out that when the Turkish lira lost 35% of its value this year, demand for Bitcoin spiked in the country. According to pro-digital currency news website Coindesk, Bitcoin was up 31% against the Turkish lira in August. Does this suggest a new trend, a new digital safe haven, is emerging?
Traditionally, during times of economic slowdown, crises or recessions, the world’s wealthy have run towards gold.
Unlikely, says Izak Odendaal, an investment strategist at Old Mutual Multi-Managers. “Cryptocurrencies have not been around long enough for us to know how they will behave in a global market crash,” he explains, noting that as technology evolves new investment products “pop up all the time”.
The likes of Bitcoin and fellow cryptocurrencies such as Ethereum certainly hold appeal for those with a high-risk appetite. For others, however, lower-risk socially responsible investing through the likes of Fedgroup’s new Impact Farming app or global option Newday is an increasingly attractive option. But for many, a combination of tried and trusted methods – such as diversification and solid portfolio management – linked with a future-focused approach offers the greatest peace of mind.
Odendaal’s advice is: “If you cannot explain it to your grandmother, then avoid it. And even if it looks very attractive, do not throw out the time-tested principles of diversification.”
Diversify, diversify, diversity
Odendaal believes investing across asset classes – or diversifying your portfolio – remains a solid bet: “Diversification is the best defence against an uncertain future… The key is to understand, as best as possible, how the underlying assets work and how it is correlated with other assets.”
He notes, however, that any investment plan should incorporate strategies for dealing with tough times. “It’s easy to say that you’ll keep a cool head when times are good. It’s better to commit to keeping a cool head upfront so that when tough times hit, which will invariably happen, you know how to respond. In tough conditions investors are often their own worst enemies, compounding market declines by selling and switching at the wrong time.”
“If you cannot explain it to your grandmother, then avoid it.”
– Izak Odendaal, investment strategist at Old Mutual Multi-Managers
Add recession-proof stocks
Maarten Ackerman, chief economist and advisory partner of wealth management firm Citadel, explains that their approach is certainly to position portfolios today to weatherguard clients in the future. “We’ll adjust our portfolios by adding more alternatives, more shock absorbers,” he says.
Citadel makes use of a multi-asset combination of hedge fund exposure, listed property and low-beta equity portfolios (“meaning that we include companies that are more defensive in a tough environment – that are almost a little immune to the recession,” says Ackerman).
Two examples are Shoprite in South Africa and O’Reilly in the United States. Why? “Because people still need to eat,” says Ackerman of a Shoprite. Similarly, a motor vehicle parts company such as O’Reilly benefits as consumers choose not to replace their vehicles, but rather maintain them. “As soon as that demand shifts, and more people are buying auto parts, then some of these companies are doing quite well and they break away from the market.”
“We include companies that are more defensive in a tough environment – that are almost a little immune to the recession.”
– Maarten Ackerman, chief economist and advisory partner: Citadel
Invest in the future
Citadel also keeps faith with new, dynamic companies such as Chinese gaming giant Tencent, says Nishlen Govender, a portfolio manager for Citadel. He explains: “Tencent can be considered a combination of Apple, Google, Facebook, PayPal, Electronic Arts [a US video game company] as well as Steam, a popular platform through which to purchase games.” Citadel holds Tencent as part of its Naspers holding due to the Chinese company’s “market share, economies of scale, barriers to entry, brand loyalty, elasticity of demand and the competitive landscape in which it operates”.
Tencent, alongside the likes of Amazon (for its robotics drive); Airbus (for its 3D printing innovations); Google (for its autonomous vehicle investments); and Cisco (internet of things infrastructure), is effectively a diversified investment in the future. They feed an investor’s need for innovation and exposure to dynamic companies, but with less risk than buying up Bitcoin.
Ultimately the key to riding out the recession storm, says Ackerman, lies in sticking to your investment plan and avoiding reactive decision-making at a time when emotions are running high. “We all get quite emotional about our own personal wealth,” he says, so start by separating the real market-moving events from the rhetoric, and keep a clear head.