LIAM DAWSON: Preparation and diversification are your compass amid global uncertainty

The global investment landscape is marked by a cocktail of political volatility, economic shifts and geopolitical tensions. For SA investors navigating this environment when global superpowers clash can feel like standing in a field while giants wrestle around us. We are the grass, and when the elephants fight it is the grass that feels most pressure. Unpredictable trade policies, shifting alliances, domestic instability and fears of slowing global growth make uncertainty the prevailing condition.

For investors, this raises fundamental questions about whether to buy, sell or hold tight. While memorable, market folklore such as Warren Buffett’s advice to “be fearful when others are greedy and greedy when others are fearful”, can be difficult to apply and often leads to more confusion than clarity. Is this the time to be fearful, or should we be greedy?

Macroeconomic indicators underscore this fear. The volatility index (VIX), measuring US equity volatility, has been spiking to levels nearing highs seen only during major crises. The Morgan Stanley global risk demand index echoes sentiment last seen during Covid-19. US equities are at the highest valuations in many decades and sensitive to any negative news. Locally, SA faces its own hurdles: political noise, weak economic growth and high policy uncertainty, now at levels seen during the global financial crisis.

In fearful times investors often flock to perceived safe havens such as gold, but these are neither risk-free nor guaranteed to protect wealth. Faced with so much uncertainty the instinct is often to retreat to cash. Yet history shows that trying to time the market rarely pays.

Holding US equities for any 10-year period has historically resulted in negative returns just 5% of the time. Market timing is a near-impossible feat, and missing just a few of the market’s strongest days can permanently erode returns.

Why is accurate forecasting so difficult? Markets are complex and driven by human behaviour, which is unpredictable, especially in crises. Even experts rarely forecast markets accurately; emotional response in crisis amplify this unpredictability.

Instead, focus on quality businesses. Strong businesses with durable advantages, locally and offshore, can weather cycles and shocks better than most. For example, Alphabet globally or SA’s Shoprite, Clicks and Capitec support portfolio resilience.

Given the difficulty of forecasting macro events, risk management and diversification are paramount. Portfolio construction should recognise that while you can’t predict returns, you can earn risk premiums by taking calculated risks, such as equities over bonds. Recent attractive returns in SA bonds show the importance of blending assets. Increasing offshore equity exposure further diversifies risk and taps into global leaders, reducing reliance on the SA market.

This approach is about preparation, not prediction. A strong process and philosophy serve as a crucial north star during crises. This involves having a clear, neutral long-term allocation or keel to maintain stability, even when making small tactical shifts. By maintaining a disciplined asset allocation and rebalancing when markets overshoot, investors can capture the rebalance premium.

Investor behaviour itself drives long-term outcomes. The real danger lies in decisions made in a panic. History shows that acting on fear during uncertainty can do permanent damage. The ultimate actionable guidance during uncertain times is to have a sound investment approach and then do nothing. As the late Charlie Munger put it, “The big money is not in the buying and selling, but in the waiting.” Trust your process and resist rash decisions.

Operating in an era of radical uncertainty is the new normal. While the temptation to time markets based on macro noise is strong, history and logic demonstrate its futility. The optimum strategy involves focusing on what can be controlled, investment philosophy, portfolio construction and investor discipline.

Perhaps most importantly, controlling one’s behaviour and resisting the urge to make rash decisions during periods of heightened fear is key to preserving and growing wealth over the long term. Allow the power of time, discipline and preparation to work for you.

• Dawson is portfolio manager at PortfolioMetrix.