The risk of a full-blown trade war between the US and China has turned into reality. Over the past three months, financial market sentiment has been dampened because of the negative impact that these trade tensions have had on global economic growth. We have now entered an environment where zero is a significant number in major developed markets – zero interest rates and zero economic growth. This drastic change in the state of the economic climate has had far-reaching implications for investors.
We believe that risk-controlled investing is the best way to grow wealth consistently. One of the many ways in which we achieve this is by continuously testing our assumptions through backtesting. This means that we examine our strategies, by using historical data, to see how well they would have performed given various economic environments. This is particularly useful when faced with uncertain situations that are likely to lead to rash and emotional decision-making.
Consider the example of companies in the Gold mining sector. The investment case for these companies is weak because of low grades, the rising cost of utilities, and a high level of labour unrest. 6 months ago, investors expected these companies to deliver 7% earnings growth in 2020. Today, they expect these companies to achieve 72% earnings growth! The gold price in Rands has increased by 25% over the past 6 months as a result of trade tensions combined with our domestic economic challenges. The prices of stocks in the gold mining sector have subsequently increased by close to 70%. Fortunately for us, we have always retained exposure to gold stocks within our portfolios. Through backtesting, we recognised that a growth investor is more likely to invest in gold stocks after the fact – when most of the value has been realised by other investors. We have used passive techniques combined with traditional methods to build portfolios that have exposure to gold stocks while providing access to the growth style of investing. Through the application of risk-controlled investing, we aim to minimize the adverse outcomes from benchmark cognisant investment portfolios despite drastic changes to the economic environment.
The IMF estimates that 70% of the global economic growth uplift that they expect to see in 2020 is dependent on the easing of trade tensions between the US and China. At this rate, there is a high probability of further downgrades to these growth estimates. This, combined with the possibility of a no-deal Brexit as well as our domestic challenges, makes for a highly uncertain environment. Despite these scenarios, we will continue to manage our portfolios in a risk-controlled manner to ensure that the relative investment returns from our investment portfolios are not adversely affected by the significant macro risks that could dent global investor sentiment in 2019 and 2020.
Lima Mbeu Investment Managers (Pty) Ltd is an authorised financial services provider in terms of section 8 of the Financial Advisory and Intermediary Act, 2002, FSP number 49018, Registration No 2017/399814/07. This document is for information purposes only. Past performance is not indicative of future performance. The information contained herein is derived from sources which are believed to be reliable. Any opinion expressed herein is based on the presenter’s current analysis and is subject to change. This presentation does not constitute an offer to sell or a solicitation to buy any security. Lima Mbeu has a conflict of interest policy which outlines how conflicts of interest are managed. This policy, as well as additional information about Lima Mbeu’s products, is readily available upon request or on our website: www.limambeu.co.za
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