The recent fall in world stock markets has been the quickest 30% drop in global equity markets since 1929. In South Africa, the fall in the markets and future uncertainty has been compounded by the Moody’s downgrade.
Since the first cracks on local and international stock exchanges in early March, at Rosebank Wealth Group we have steadfastly recommended that our clients should sit tight, not panic and remain invested.
It is simple logic that to participate in any upswing, you have to remain invested. Timing the absolute bottom is difficult for professionals, not to mention other investors without the requisite tools, information and skills at their disposal.
Last week international markets sensed that the first signs of revival for two reasons.
Firstly, there are early indications that the rate of new infections and deaths of Covid-19 infected patients in Asia and some parts of Europe have stabilised. In Asia, the slow return to work and the lifting of travel and quarantine restrictions from hard-hit cities and provinces have offered comfort and a glimmer of hope.
Death rates in hard-hit Asian countries such as China and South Korea are now in single-digit numbers, proving to the world that the pandemic does have an endpoint.
Latest figures (March 30) show that on mainland Europe new infections and the number of deaths in some countries, such as Italy and France may have slowed.
However infection rates in Spain, the UK and Germany continue to rise. The UK has issued a statement saying that infections should peak in mid-May.
There are significant concerns regarding the pace of patient deaths in the United States. Two central issues include the fact that the president is anxious to take steps to get the economy moving, while at the same time the US seems to have more than its fair share of ‘Covid-19 is a hoax’ believers.
We are mindful that it is difficult to compare the vulnerability of countries at different stages of the epidemic because of the meaninglessness of ‘confirmed positive’ statistics. According to Oxford University’s Our World in Data series, as of March 20, some countries like South Korea had tested 6 148 people per million population while others such as Brazil had tested 13.6 people per million population. For the record, according to this data SA’s testing rate was 109.6 per million population on this date.
Secondly, many countries have reduced interest rates or announced relief measures. Late last week the president of the US signed a $2 trillion Covid-19 relief package aimed at assisting American businesses and citizens. In South Africa, the Reserve Bank has had two ‘money injection’ initiatives. On March 20 interest rates were cut by a full percentage point from 6.25% to 5.25%. In the following days, the Sarb announced that it would intervene in the bond market to assist with liquidity. Emergency packages and/or rate cuts were also announced in the UK and Germany.
These initiatives led to three straight days of price increases on the JSE and international stock exchanges last week.
However late on Friday 27 March, Moody’s downgraded South Africa to junk, with a negative outlook. A slight reprieve was that SA government bonds won’t be excluded from indices that track investment-grade debt immediately but only over the course of the next couple of months.
As with all countries enduring the pandemic, the rate of economic recovery will depend on the level of disruption, the length of the disruption and the shape of the recovery.
Buying under-valued companies
Downturns provide long term investors good opportunities to buy quality shares and the most recent turmoil has resulted in many quality shares, both in South Africa and offshore, at very attractive levels. In the lead up to the Covid-19 crisis, many South African fund managers had started to build cash reserves in the expectation of a Moody’s downgrade. These fund managers are now well-positioned to deploy their cash to buy good quality companies at good prices on their clients’ behalf.
Fund managers of unit trusts and other investment vehicles will be looking to load up on two categories of shares; those quality ‘blue-chip’ shares that traded in less affected sectors, which have been oversold and are now trading at excellent value, and those companies that appear to be best equipped to navigate the post-Covid-19 trading environment.
However, sectors might be deemed ‘good value’ in some countries might not be good value in others. For example, the prices of bank shares like Bank of America, Standard Bank and Nedbank have been decimated as investors have priced in the likelihood of increasing bad debt. But while foreign banks might be saved with government bailouts, this is less likely in South Africa.
Buying companies that are well placed to survive and flourish in the post-Covid-19 world.
Fund managers surveying the post-Covid-19 carnage will no doubt be spending some time thinking about the legacy of the virus and how the world has changed. The world may pause and reset its global priorities.
This may give birth to new trends. The consumer demand for green investing may well pick up its pace. The pandemic may spawn new investment interest in health research. Post-virus more consumers, firms and governments may be more tech-literate. On the other hand, the tourism, airline and high street retailer sectors may take many years to recover.
Many consumers may have had their first experiences of virtual work, online shopping, online education, online fitness courses and so on. After experiencing and understanding the benefits of these services people may incorporate them into everyday post-virus lifestyles.
Traditional large businesses that were previously sceptical of the benefits/ direction/ capacity of technology may no longer delay the research and investment and implementation of technological innovation that will enable their survival in the post-Covid-19 world.
From a government point of view, the Covid-19 pandemic will give the world a glimpse of how the digital capacity, or the lack of it, can carve different futures for different countries, communities and populations. Post Covid-19 we will have a sharper sense of the hidden cost of ‘digital poverty’ after seeing how poorer communities were relatively less equipped to fight the pandemic.
Concerning protecting the lives of healthcare personnel, it is likely that countries higher up the digital curve were better positioned to protect their doctors and nurses. These observations may be a spur for large-scale government investment in technology.
On the other hand, some long term trends will remain in place. The ageing population in the developed world is likely to be a source of investment opportunities. Over 65s will require housing, medical services and personal care services. Governments may have (even less) to spend on education and policing, giving rise to private education and security businesses around the world.
Rosebank Wealth Group has access to a wide range of funds in a wide range of countries. We have ongoing, close contact with our fund managers to keep abreast of investment opportunities as they arise. Please contact us for further information.