Asset allocation in times of uncertainty

South Africa finds itself in uncharted waters with a coalition government, posing new risks for investors to grapple with. As markets navigate through this uncertainty, the question arises: Is it time for retirement funds to consider hedge funds in their asset allocation strategies? Handré Retief, Portfolio Manager at Novare, offers insights on the case for and against hedge funds in a portfolio. He emphasizes the importance of risk mitigation and the opportunities presented by long-short and market-neutral strategies. While acknowledging the historical stigma surrounding hedge funds in South Africa, Retief believes that the awareness of their diversification benefits is gradually gaining traction among investors. Reflecting on the global landscape of alternative investments, Retief notes that only around 2% of capital investments in South Africa are allocated to alternatives, in stark contrast to the global average of approximately 10%. He attributes this disparity to the negative perception often associated with hedge funds, a sentiment that he believes is evolving over time. Amid the backdrop of geopolitical tensions, market volatility, and shifting economic dynamics, Retief highlights China as a focal point of concern. The recent monetary policy actions in China, coupled with sluggish growth and commodity market fluctuations, have prompted a cautious approach to commodity investments. While acknowledging the positive market sentiment towards South Africa's Government of National Unity and its reform agenda, Retief expresses optimism about the local market's potential for strong returns. In the realm of equities, Retief sees opportunities in financial sectors, particularly banks and insurance companies poised to benefit from potential rate cuts. He also identifies value in SA Inc small-cap stocks, citing their low valuations and recovery potential. With a long-term GDP growth outlook in mind, Retief remains cautiously optimistic about the prospects for local stocks, albeit with a hedging strategy to manage risks. When discussing the bond market, Retief favors the middle part of the curve, considering the potential impact of global factors such as US Treasury yields and upcoming elections. While acknowledging the current attractiveness of bond yields, he anticipates a moderate compression in yields moving forward, especially in the middle part of the curve, aligning with a defensive investment approach. The market outlook presented by Retief underscores the importance of prudent asset allocation and risk management strategies in times of uncertainty. As investors navigate through volatile market conditions and geopolitical uncertainties, the balance between risk and return remains a key consideration in optimizing investment portfolios. With a cautious yet opportunistic stance, investors can position themselves to weather the storm and capitalize on emerging opportunities in the ever-evolving investment landscape.