Allan Gray points out that one of the biggest risks to SA investors is their exposure to China. This comes from large international companies listed on the JSE that have a high reliance on Chinese consumer and mining-related material demand and via Naspers.
The JSE All Share Index is highly concentrated
The top 10 shares of the JSE make up 56.5% of the index, of which Naspers comprises a large 20%. Naspers’ value all lies in Tencent, a Chinese social media company.
Why worry about China?
China is a complicated place to understand. While there is much opportunity, the rapid growth of its debt is a concern and it is unsustainable.
China has experienced a rapid credit boom since the global financial crisis, with private non-financial debt increasing from 120% of GDP in 2008 to more than 200% today. History has shown that some type of correction is inevitable, which will negatively affect companies and industries that are overly dependent on Chinese demand.
Other than Naspers, many other large companies on the JSE have significant exposures to China, such as Richemont (36% of sales), BHP Billiton (48% of sales) and AB Inbev (7% of sales).
Diversification is key
Aside from simply picking different companies, industries or countries, investors need to get a good sense of where underlying returns are coming from, and what impacts those returns. They must also make sure that their investments are not all highly correlated.
Conclusion – Worry about the right things
Investors need to make sure they are worrying about the right things. They should focus closely on what is in their portfolios, rather than spending time trying to forecast on political or economic outcomes. Risks such as exposure to China do not have to be avoided completely, but their size in an investor’s portfolio should be appropriate.
Investonline balances your risk
At Investonline we ensure your portfolio is appropriately diversified to suit your specific risk profile. We monitor portfolios and meet with fund managers continuously in order to make the necessary adjustments to balance risk with capital preservation and growth opportunities.