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Covid-19: Have the markets overreacted?

‘My fear is that the damage due to people’s reaction is much larger than the medical impact’ – Nazmeera Moola – Investec Asset Management.

RYK VAN NIEKERK: Welcome to this market commentator podcast. It’s my weekly podcast where I speak to leading investment professionals. My name is Ryk van Niekerk. My guest today is Nazmeera Moola. She’s head of investments at Investec Asset Management, Nazmeera thank you for joining me. Covid-19 is causing havoc on most world markets. On Thursday last week, the US markets dropped by more than 3% and it follows the Federal Reserve’s emergency rate cut, a significant rate cut. What do you make of this market reaction to the virus?

NAZMEERA MOOLA: I think the reaction is due to the virtual shutdown you’re seeing in areas around the world. First it was China, which is slowly reopening now, but we’ve seen a similar reaction in Northern Italy take place where people are describing the streets of Milan as a ghost town out of a movie. So it’s not surprising that you are starting to see people really worry about the impact it’s going to have on growth and ultimately company earnings and therefore the stock markets.

RYK VAN NIEKERK: But it seems as if there is not quite a consensus perspective of what is happening. We see significant swings in markets. Sometimes you see 3%, 3.5% drops and then you see 2%, 2.5%, 3% recoveries. Again, that volatility, do you think that indicates a lack of understanding of the potential impact?

NAZMEERA MOOLA: I think there is a lot of uncertainty right now on the impact of the virus itself, so initially there was this fear that you are going to have mass deaths that could rival the Spanish flu and the consensus that’s emerging from the medical community seems to be, I mean I’m not an expert, but from what I can read it seems to be that it’s going to end up being a bad flu, so when the medical diagnosis is uncertain you are then trying to translate that into an economic diagnosis [which] is even more difficult and initially the view was that this would be short-lived and would affect earnings only in the short term, but it’s becoming, well our thinking has evolved to think that what we are seeing is this J-curve effect where in sections rises dramatically in a country and you see these dramatic shutdowns, people are worried and that translates into the economy. Perhaps not as bad as China, but certainly repeatedly over the course of the next couple of months and that is going to prolong the impact. So the problem is not so much the actual medical impact, its the economic impact given people’s reaction and that is why you see this volatility in the markets.

RYK VAN NIEKERK: So, what is Investec Asset Management doing, are you also turning a bit defensive in anticipation of this poorer economic performance?

NAZMEERA MOOLA: Well, I think we have been defensive for some time and we’ve gotten more so recently, although not extremely, we are taking it cautiously, but we certainly think that the impact could take longer to play out than markets initially discounted.

RYK VAN NIEKERK: There were some analysts who predicted a V-shape correction or a spike, following the initial reaction. But you think it may take longer than many people think for the market to actually recover?

NAZMEERA MOOLA: One of my colleagues put it really well this morning. He said what we’ve seen over the course of the last decade is massive liquidity provision by the central banks and the liquidity provision has been greater than the growth concerns at any point in time. And the question right now is whether that is still the case and unfortunately it seems like the gross downgrades are likely to be larger then the benefits from the liquidity provision from the fed’s rate cut, from any sort of quantitative easing that happens and it’s only once we get to the inflection points where we stop worrying about growth that I think you stopped to see any pickup in markets. Therefore I don’t buy the immediate V-shaped. I think it’s going to take a bit longer than that.

RYK VAN NIEKERK: Of course the US Fed aggressively cut interest rates and many other countries in the world are said to follow. What do you think of the South African interest rate prospects?

NAZMEERA MOOLA:

I think there’s still room for the South African Reserve Bank to cut interest rates.

I think that the current movement in the rand will certainly worry them, but you’ve seen a downward move in oil prices to compensate so we aren’t going to get inflation coming through the petrol price, which is helpful. I think the Reserve Bank is waiting to see whether there is self-help in South Africa in terms of the budget notably. But if that continues to develop positivity where we see actual progress on the wages then I think there is room for 75 basis points cuts from the Reserve Bank this year.

RYK VAN NIEKERK: And the JSE, the reaction has also been very volatile. How does the JSE’s reaction compare to what we saw on other world markets?

NAZMEERA MOOLA: So with regard to the JSE, the overall volatility in the local markets is going to be driven by what happens globally. Partially because of sentiment and partially because a lot of the earnings on the JSE are exposed to the global economy either via commodity prices or through South African-listed companies that have large shares of revenues coming from abroad. So it’s not surprising that you’re seeing this sort of volatility. It has, however, generally been lower that we’ve seen in a number of other markets, certainly much lower than we’ve seen in the currency and I would expect that to continue.

RYK VAN NIEKERK: But in the US we saw the markets fall from all time highs and they were concerns about overvaluation in some of those markets. The South African market did not come down from historic highs to the contrary. Our market is actually under some pressure. Do you think our market can maybe recover a bit quicker because the market fell from not the highest we saw in the US for example?

NAZMEERA MOOLA: I think the key in our market is going to be what we do during this time of crisis. What we’ve seen in other periods of time is countries, that practice self-help, that do everything they can to control the areas they can control are the ones that would recover fastest and in South Africa’s case that means controlling the growth of the wage bill in the public sector and opening up the grid to the private sector. The wage bill and electricity generation are the two things we can get done in a relatively short space of time. I would suggest within the next couple of months that would help us deal with this global shock that’s going through the system. And if we manage to do that then I think our equity markets will recover faster. If we don’t do those things then no, I don’t think we can recover faster.

RYK VAN NIEKERK: The current volatility on the local market flows through from the volatility in international markets. So what you’re saying is that there are domestic things we can do with things that were promised by the president and that could have a positive impact despite what we see in international markets. Is that the scenario you’re painting?

NAZMEERA MOOLA: The direction of the market will be determined by what’s happening internationally. But the beta to that will be determined by what we do locally, so if we do things locally and markets start to recover, South Africa will outperform what’s happening for everybody. That’s what I’m saying.

RYK VAN NIEKERK: What do you think of the evaluation of the current market?

NAZMEERA MOOLA: I think it depends on your outlook for the relevant sectors. A large portion of our local market is mining so therefore an outlook on the global economy is key. If we think that the current deterioration in growth is short-lived, the mining sector offers a lot of value. If we think the recovery is going to take … the world’s going to slip into a global recession, then we’re not going to see a recovery until next year. Then there is value in the mining sector and we can talk through the various other areas in a similar manner. It depends on the growth outlook in each case, but that’s why I keep coming back to this idea that South Africa needs to do everything it can do to support the local growth outlook.

RYK VAN NIEKERK: Retail investors are really worried. I’ve received several emails from people asking what they should do. They see some significant capital erosion. They don’t want to overreact on irrational behaviour from some international markets. What advice would you give normal retail investors looking at what is happening in the markets right now?

NAZMEERA MOOLA: I would suggest that people don’t panic, at this point in time you need to take a longer-term view so therefore I wouldn’t lock in losses. But I’m not saying it couldn’t fall for them in the short term, but if you are prepared to take a 12 month view, I think they should be fine. On a longer-term view I think you need a balanced portfolio, so I wouldn’t have everything in equities. You want to have some proportion in income-producing assets and South Africa produces relatively high income at this point in time in it’s absolute return products or multi-asset fixed-income funds. So I would include those in your portfolio and also some measure of foreign diversification.

RYK VAN NIEKERK: So sit on your hands. Don’t try and be smart. If it’s a long-term investment, ride this one out. Conditions will return to some sort of normality. You think in around 12 months time?

NAZMEERA MOOLA: From the reading I have done, I think we are going to end up with Covid-19 becoming as endemic as the flu and the mortality rate as the data continues to be gathered, continuing to drop. So we started at 2% we now 1% probably going to end up below half a percent. It could be higher than the normal flu, but still high. And we will treat this much the same way as we treat the normal flu. Do you know how many people have died from normal flu-related issues in the US in the year to date, bearing in mind that we are two months into the new year? Somewhere between 37 000 and 45 000 people.

RYK VAN NIEKERK: In two months in the US due to normal flu?

NAZMEERA MOOLA: Well this is their worst seasons, this is their peak of winter. So it’s not, I mean it’s not something that they would evenly spread across the year, but across the year as a whole, they normally have somewhere around 80 000 people dying of flu-related issues.

RYK VAN NIEKERK: But that clearly indicates a significant overreaction. Does it not?

NAZMEERA MOOLA: That is the view that I’m increasingly coming to, we don’t have enough data. We know that human psychology is that when you have uncertainty, you overreact to the cautious side. So the reaction we’ve seen is not surprising, but increasingly it does seem like the reaction is over done. I mean what we saw interestingly this week is the advice from the World Health Organisation from last week on to Monday was that if a worker is found to be contaminated the whole factory office should be evacuated and deep cleansed. And then on Tuesday or was it Wednesday, the advice changed to only that employee’s workstation needs to be deep cleansed now. So there’s some measure of rationality slowly creeping into this.

RYK VAN NIEKERK: Nazmeera, thank you so much for your time and I hope your predictions are correct. I also think it’s a bit of an over reaction. I think the damage to the economies around the world will be a lot more damaging than the virus itself.

NAZMEERA MOOLA: That is my fear, that the damage due to people’s reaction is much larger than the medical impact.

RYK VAN NIEKERK: That was Nazmeera Moola, she’s the head of investments at Investec Asset Management.

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COMMENTS   6

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No one is talking about the fact that the worst hit areas ( in China, Italy and Iran) are the areas with the highest CO2 levels – being highly industrialized areas where Oxygen levels have been compromised. When India finally tells the truth about their fatalities, they will mostly be in Delhi for the same reason.
Climate Change….in my opinion has something to do with this outbreak and this needs to be investigated, acknowledged and acted on to prevent similar situations in the future.

Very impressive chap this Mr Moola-reasoned, calm, mature. A pleasure to read

Dear SAM The Taxman
Isn’t Nazmeera a lady ?
Perhaps you should consider changing to SAM The Taxperson …

My sincerest apologies! Age is the best excuse I can offer for this dreadfully demeaning conduct.

But surely the substance of the discussion should take precedence?

Covid-19 could possibly be the needle that pricks the everything bubble, but it is not the reason that the ‘markets’ are due a significant drop. Most likely at least 50% and if you are believe in the hold for long term mantra, your time frame for the ‘market’ to return to present levels may be measured in decades!

End of comments.

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