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Investing in a post-Covid world

Is local investing still relevant?
Image: Shutterstock

Despite the uncertainty about the domestic and global economy, financial markets have staged a rapid recovery since the Covid-19 pandemic triggered a severe sell-off in February and March this year. The fiscal and monetary stimulus of economies contributed to the improved sentiment in markets since April, but the question is to what extent this can be sustained?

We are also faced with a variety of problems in South Africa that will not disappear overnight.

Going global or staying local

In addition to challenges at home, the global economy is also plagued with substantial uncertainties. Global economic prospects hinge on Covid-19 timelines. It is still uncertain when we will get a vaccine, produce the quantities required, and make it available to masses of people.

Read: Aspen to make Covid-19 vaccine candidate

We also wonder what will happen to all the debt that has been created on government balance sheets around the globe. And what surprises will the US presidential election bring?

Is local investing still relevant?

The past five years delivered disappointing real returns, mostly due to an abnormal period of asset class returns in South Africa. This period saw conservative assets, specifically cash, significantly outperform growth assets like equities and listed property. Traditionally one expects long-term riskier assets, specifically equity, to substantially outperform cash.

South Africans are legitimately frustrated with the situation. Investors and citizens have been through a period that has tested us on every conceivable level.

It seems that the government has been able to make more progress in 18 months than what was achieved in the preceding 10 years. Regrettably, it does not show in our economic growth numbers, and that is going to take some more time.

The expectation is for the economy to stage a recovery from a low base next year, and then to build momentum from there.

Read: Treasury’s 2020 GDP forecast revised down to 7.8% decline

In the meantime, we are offered excellent investment entry points into great South African businesses. Bond yields are also offering returns that will comfortably beat inflation. We believe the next five years will look materially different from the preceding five – and in this environment investors need to be aware of the consequences of being either too conservatively positioned, or not being sufficiently diversified.

Contrary to popular belief, investment prospects in South Africa are remarkably attractive.

Superior returns are not on the table in an environment where the outlook is clear. The best investments are made during challenging periods, when valuations are cheap, and uncertainty is high. Now is the time for well diversified portfolios that mitigate risk while seeking disproportionate upside potential.

Perspective in times of crisis is critical

In times like these, staying focused on the bigger picture is critical. We too often see investors obsess over fund performance numbers. Yet, there seems to be little cognisance of the fact that, even if you were to find the best fund portfolio, odds are the average investors’ experience will be very different. Why? Because investing is a process that is susceptible to emotional interference. Investors rarely remain unswayed by news or market movements. Instead, they tend to panic and make poor decisions.

This means that although the fund manager is performing well, the investors are not using the product correctly, and therefore not extracting full value. This is exactly where a good financial adviser can be very valuable. In tough times an adviser should guide you on how to avoid mistakes, with buying high and selling low topping the list of expensive mistakes investors typically make during tough times. Keeping a rational, long-term perspective is more important than ever and will help you achieve your investment goals in a post-Covid world.

Adriaan Pask, CIO, PSG Wealth

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An economy that is heavily reliant on the inflation-adjusted (real) price of commodities is always at the mercy of the US Federal Reserve. Local mines, wheat and maize farmers, poultry and red meat producers, the financial institutions that finance them, their shareholders, as well as the fiscus that relies on their profit margins for tax generation, are at the mercy of the Fed.

The relative strength, or weakness, of the dollar, depends on the interaction between monetary and fiscal policy in the USA. A tight monetary policy by the Fed, relative to the other Reserve Banks, combined with a loose fiscal policy in the USA leads to a strengthening dollar. The dollar has strengthened by 33% over the last decade.

Commodities are priced in dollars on the international market. The price of commodities, the profit margin of the producers and everybody else in the value chain, up to the employment rate and the taxman suffer when the dollar is strong. A strong dollar consumes the profit margins of commodity producers as the debt and overheads remain the same, or rises with a weak local currency, while the dollar-denominated price declines. This phenomenon has caused countless emerging markets crises in the past, and it is doing so again. This process has already closed down many mines and farming enterprises in South Africa and has led to high unemployment and an unsustainable Debt/GDP ratio and a budget deficit. The ANC incompetence, criminality and socialist myopia aren’t helping either.

To cut a long story short – the dollar has changed the trend and is at the beginning of a long-term trend to a weaker dollar. Loose monetary policy in the USA will drive the dollar weaker to increase the profit margins of all commodity producers and to bring some much-needed relief to investors, financial institutions and tax authorities in emerging markets. An emerging market country that did not suffer a credit default in the last decade, will be in a better position to handle its debt in the future. The Fed is engineering better profit margins for commodity producers. A weaker dollar is a lifeline for the economies of developing nations.

Sense’s observations are correct. Emerging markets generally should do better while US interest rates remain at low levels.

That said, after your 20% home bias in your portfolio, the rest should be invested on a diversified basis globally.

Insofar as the proportion of your portfolio allocated to emerging markets is concerned, the 20% allocated to SA is already an overweight position.

If you do want more exposure to emerging markets, go Asia -ex Japan. I wouldn’t bother with Turkey Russia and Brazil.

I agree with your recommendation to invest in Asia ex Japan.

I’ve been invested in the Baillie Gifford Pacific fund for the past ten years and it has performed extremely well returning 22.3% in the past five years versus a 13.1% rise in the benchmark MSCI All Countries Asia ex Japan index. That’s a USD return so in ZAR terms it has had a further 30% boost.

Presumably the local currency profit margin of the commodity will only suffer when the dollar is strong if the USD price of the underlying commodity is constant?

Isn’t this also a multivariate equation as the margin depends on what percentage of the commodity producers costs are USD denominated?

Additionally the exposure of the commodity producing country’s economy to the USD is a factor for the local fiscus and employment. For instance the GCC states are almost fully dollarized so the impact of swings in the USD are neutralized.

Or am I missing something very obvious here???

End of comments.

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