How to navigate market volatility: insights for investors

Despite all the publicity, this year’s biggest winners and losers have much less to do with the shocks of war and tariffs than you might expect. Emerging markets and Europe have outperformed despite being big exporting economies, while the US dollar has fallen in value, and inflation and interest rates have moved down.

Surprising market outcomes are often more about what’s already priced in, before the shock hits. When the worst happens, the impact is often less for markets out of favour, deeply unpopular, and lowly priced. Latin American equities are a great example; they have been a top performer this year, in spite of the wild west tariff shoot-out.

So how can investors reduce sensitivity to shocks?

Start by accepting that we are in a transition period when the range of feasible outcomes has increased, as the new US government aims to make a clean break from the past. Uncertainty is greater because all countries are impacted when the dominant world power changes its economic and foreign policy. This makes it an opportune time to ensure portfolios have different sources of risk and return, and hence can deal with a broader range of scenarios.

A first step is holding assets that can really pay off when economic conditions dramatically change. The classics are inflation-linked bonds (when inflation rears up) and high-quality sovereign bonds (for when growth takes a hit). Together, they are a handy way of tackling the potential inflationary and recessionary impact of military and trade conflicts and the emerging disinflationary pulse of Artificial Intelligence. We recently topped up our exposure to Inflation Linked Bonds and UK Government Bonds, following a rise in yields.

A second is investing in markets that reflect low expectations and so have more potential to surprise on the upside. The more markets you can research, the more opportunities you can uncover. You can improve your chances of finding them by combining company-level with industry and country-specific research. 

A third is looking across both local and global opportunity sets to improve diversification in an environment where short-term sentiment can obscure longer-term fundamentals. The balance between local and offshore in rand-based multi-asset portfolios provides a natural release valve during periods of extreme shocks.

As we’ve seen since the start of the year, local assets that were priced for relatively poor outcomes have shown more resilience than US assets that were priced for very little downside. South African government bonds continue to provide attractive real yields that provide a differentiated payoff profile to more volatile equity returns. Rand-based investors staying the course are likely to earn real returns of more than 5% with additional upside from a currency that has also shown more resilience than many would have expected coming into the year.

* Neethling is the head of investments at Morningstar Investment Management South Africa.

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