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See the bird with a leaf in her mouth

Mar 26, 2020 | Market & The Economy | 1 comment

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The announcement earlier this week that South Africa will enter a three -week shut down at midnight tonight, whilst daunting for many, is in fact good news for the country. Our government has managed this situation incredibly well so far. The possibility of flattening the curve will be a welcome relief to our health services and to our delicate social fabric.

As you are aware local and global markets have gone into panic mode ever since the virus surfaced in Italy. An oil price war within OPEC has only added fuel to the fire (no pun intended). Every asset class has come down in price except for US dollars. This means that when asset managers looked to move into defensive asset classes like bonds, they found that these markets were also being sold down.

We are witnessing panic globally as the outcomes to all that is going on now are difficult to predict. It is firstly a medical issue, then a social issue and finally an economic issue. What is obvious is that markets have sold off very heavily since 20 February 2020. Global equity markets are down around 35% in USD and the local market, which looked fairly priced in February is down 30%.

There are many, many questions currently circulating. Here are a few that we have collated and answered with our thoughts and opinions.

Will they work out ways to cope with the virus?

There are different examples and the first signs of recovery are already visible, with statistics improving in China, Hong Kong, South Korea and, possibly, Italy (Monday). South Africa holds a significant advantage of being three weeks behind others but we now need to act swiftly and respect the restrictions that have been put in place.

 Will this affect business?

Sadly, many small to medium size businesses will take major strain in this period – many already are. After three years in a tough trading environment, we now enter an unprecedented period of shut down. Employers and employees will need to be fair to each other in this period. Landlords and creditors will need to think more long term.

 Stimulus packages?

Governments globally have acted to get ready to help businesses as they emerge from the lockdowns. Already we have seen a one percent cut in interest rates and more are likely. Offshore they do not have much interest rates to play with, but they have cut them further if we are to get through this.

What is unprecedented is the level of funding that central banks (Reserve banks) around the world have made available, literally opening the cheque book and being prepared to print money to help. The US announced $2trillion dollar package. When the general panic subsides then we are going to see these interventions have an effect.

 What should I do with our investments?

It is very scary to see what is happening medically, socially and now in the stock markets. Your first job is to stay indoors and isolate. You are likely to feel that you should get out of the market and limit your losses. However, your preferred route of action at this point is to stay the course. The movements in the market are so dramatic, even on a daily basis. It is up to us and the asset managers we employ to make the moves for us.

What actions are being taken?

There is quite a bit of action taking place daily within the portfolios. In January and early February we felt that the US markets in particular were over-priced, and we felt that South African shares and emerging markets in general were offering value. The US market can still come down further, and possibly will, as infection rates there rise. But, the various asset managers are also seeing huge opportunities. Reviewing their portfolios, they see that other investors have oversold some companies, which gives them the opportunity to buy these great companies at a cheap price.

How have our managers fared?

Overall, we are happy. Remember, no one saw the virus coming. Locally our stars have been Rezco and Investec Managed, who had very high cash holdings going in this crisis. Coronation, Allan Gray, Prudential have all performed in line with each other.

Globally value managers, who buy companies that were already unloved, have been hit hardest.  Orbis, Schroders, and Dodge & Cox fall into this category. Quality or Growth managers have also come down; as the companies they own lost value. However, where their share price looked expensive going into the crisis, it now looks like these good companies are again starting to offer value. Emerging markets have been it hard again as investors move to US dollars.

 Are managers buying in right now?

All managers are re-balancing their portfolios, for example, if you previously held, for example, 60% in shares they are buying back to these values again. Passive managers have had nowhere to hide. Some of the more aggressive managers are buying at this point, others with a more preservation mind-set are holding back. No one is calling the bottom yet.

Should I be switching?

In our financial planning process with you we have identified a target return, which also points us to a certain asset allocation. As we mentioned, the managers are reallocating these funds back into the right blend of risk assets to make sure you benefit when markets rebound.

You should not be contemplating switching down to a more conservative portfolio at this point. You could instead be considering moving up into a more aggressive portfolio. For those of you in cash, the sale of the decade has just opened up. The returns we will get in the next 10 years from here will be spectacular.

Surviving stormy seas

The Biblical story of Noah and the Flood tells of Noah sending out a dove to see if the waters have subsided. The dove returns with a fresh olive leaf in her beak. This was a sign to Noah of life after the Flood and of God’s bringing Noah, his family and the animals to land.

Our message to you right now is to stay in the boat and our job is to keep you in the boat until the storm stops, the waters settle and the dove returns. The asset managers job is to look for the bird with a leaf in its mouth and decide, which piece of land is best positioned after the flood, and most likely to flourish for the next ten years.

So, for the moment, we encourage you to be cautious but first and foremost to stay safe, stay well and to take care of yourself and each other..


1 Comment

  1. Chris Moll

    Sound advise I believe and you would be wise to heed it.


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