Diversify all you like, but sell-off in growth assets might still bite you
Greta Thunberg’s impassioned speech at the UN about climate change elicited strong emotional responses. Five hundred words from a 16-year-old Swedish schoolgirl, about whom most people know little, have divided global opinion.
The core of the problem is not whether we are experiencing climate change. It’s a fact that, in the past 300 years, we have measurably experienced changes in the earth’s temperature. What is unclear is the underlying cause and solution. Yes, we have in the past few decades experienced a huge spike in carbon emissions but, what is dividing opinions, is whether this is indeed the main cause of the most recent global warming and whether reducing carbon emissions will be effective.
It reminds me of the active vs passive debate in investments. In SA, there is clear evidence that a number of active managers have been able to beat the index consistently, yet the debate to determine whether an active or passive approach is better rages on.
But the real question is what your investment objective is and how best to achieve it. Invariably, every asset-allocation decision involves an active decision but the choice of the underlying investment building block will be influenced by its cost, investment appetite and overall investment strategy chosen by your adviser.
Often, focusing narrowly on an issue does not allow for a broad enough perspective. Concerns about the fiscal position of SA Inc should also consider the global economic slowdown. The globe got drunk on quantitative easing. In the US, the yield curve is still being watched though the transmission mechanism has been muddled by the actions of central banks.
Even Shoprite’s growth engine on the rest of the continent has suffered a serious speed bump due to a sharp slowdown in the Angolan economy
For SA investors, the world is a treacherous place while we plunge into this so-called “growth recession” and there is no guarantee that a simple diversification strategy will insulate one’s investments from a sell-off in growth assets. Diversification is not only a tricky decision for individual investors. This approach has in fact proved costly for companies. Australia is the place where many local companies have paid “school fees”. Woolies had to write down their David Jones investment by almost 40% and Spur also made the decision to exit Australia recently.
Sasol’s GTL project in Louisiana took a heavy toll as the project economics failed to live up to expectations due to a doubling of capital expenditure. Even Shoprite’s growth engine on the rest of the continent has suffered a serious speed bump due to a sharp slowdown in the Angolan economy.
With limited management bandwidth it is not as obvious to run businesses across geographies and to enjoy the same returns without the same critical mass as in SA, especially where conditions are much more treacherous for those without local knowledge.
Consumers continue to expect cheaper and more efficiently delivered services — from 24 hours-a-day digital banking via an app to “free” voice calls via the internet. But then it should not come as a surprise that our banks are reshaping their physical infrastructure in favour of digital channels, leading to job redundancies.
FNB reports that while a decade ago only a third of customer transactions were via digital channels, 70% are now using digital channels. Capitec, SA’s fastest-growing retail bank with 12-million customers, push three-quarters of their transactions via the digital channel despite having more than 830 branches nationwide and planning more than 21 new ones in the next six months.
The pace of change isn’t slowing with app transactions now outpacing online transactions for the first time in 2018 at FNB as customers migrate to more convenient channels.
The source of disruption is often unexpected. Capitec has written a million funeral policies through its branches and is undercutting the traditional insurance players. The premiums generated by Capitec in the funeral business now rival those of Sanlam, a 100-year old business.
The concern that many job intensive industries could suffer severe job losses as technology replaces humans is real, for example in the security industry a drone fitted with a camera can effectively replace a number of security guards. The Foschini Group not only has adopted a multichannel offering but its delivery service can now track your cellphone and deliver at your specific location even when you are on the move, proving a real threat to physical stores long term.
As with the climate, change is the only constant. Companies can either evolve or become extinct. But evolution doesn’t always equate to revolution. An ill-conceived acquisition in the UK or Australia can become the noose about the company’s neck — ask Steinhoff or Brait.
Customers are looking for value and convenience in these tough economic times. This is also forcing the companies into a vicious cycle of cost-cutting and job-shedding to counteract other cost pressures. While unions are trying their damnedest to fight off this secular trend, companies are dancing to the slow beat of our convalescent economy.
The way forward is business-friendly economic policies, which will boost business confidence and encourage job creation — Ramaphoria 2.0. Only then will a virtuous cycle of investment, job creation and consumption recover — unless, like many of the above-mentioned trends, this transmission mechanism needs to be short-circuited in this whole new world that we live in.
• Rassou is the head of equities at Sanlam Investments