Market rout: Too late to panic?
This week, SA investors woke up to a coronavirus-inspired bloodbath on financial markets, as panic selling prompted a global flight to safe-haven assets such as gold and US bonds
This week, SA investors woke up to a coronavirus-inspired bloodbath on financial markets, as panic selling prompted a global flight to safe-haven assets such as gold and US bonds.
On Monday, oil prices crashed 31% in the biggest drop since the Gulf War. It sent the JSE down more than 6%, taking its year-to-date loss to over 13%.
International markets weren’t spared either: £130bn in market value was wiped off the FTSE 100 within minutes of opening; European stocks plunged 9%; and the S&P 500 opened 7% down, triggering a temporary trading halt.
For retail investors nursing battered retirement portfolios, the question is whether it’s time to flee the carnage — or is it already too late to panic?
"Is there a chance that this could go lower? Yes. But you’ve got to distinguish between what’s possible and what’s probable," says Galileo Capital executive director Warren Ingram. "We’re advising clients who have cash available to invest to buy faster than they probably would’ve done before the ... coronavirus."
Ingram says SA pensioners can take some solace in the fact that they probably have a sizeable exposure to SA government bonds.
Though "solace" and "SA government" seldom appear in the same sentence, local bonds have among the highest real yields in the world. The benchmark 10-year bond is currently yielding 9.055% against inflation of 4.5%, giving investors an after-inflation return of almost 4.6%.
"When this washes out, which it will, quite a lot of new money will go looking for yield, especially if policymakers respond as they’ve indicated they will," says Ingram.
"The US has a lot of scope to pump more liquidity into the system and China is likely to do the same."
Not everyone is sanguine.
Sequoia Capital, one of the biggest venture capital firms in the world, sent a blunt e-mail to CEOs of its investment companies last week, warning that monetary policy is likely to be a "blunt tool" against Covid-19.
Sequoia warned it might take several quarters before the virus is contained, and even longer for the global economy to recover.
This is partly why Magnus Heystek, director at Brenthurst Wealth Management, says it’s not too late to panic.
"Every 10 years or so there comes an event that you have to react to," he explains. "I’m not a believer in just sitting by and doing nothing. This could be a ... cascade that continues for a very long time."
Heystek says he would advise pensioners invested in tax-sheltered products, such as living and retirement annuities and preservation funds, to consider moving 50%-75% of their assets into cash, with a view to moving it back into equities once a clearer picture emerges of where the economy — and markets — are heading.
"Moving money into cash is the prudent thing to do," he says. "At worst, you’re going to miss out on a bit of recovery."
Johan Strydom, a director at Sterling Private Wealth, is at the other end of the spectrum. He says selling out of local equities now could be a mistake in the longer term.
"Selling out of the local market when you’ve just had a sell-off on top of the stagnant past five years doesn’t really make sense," he says. "You don’t want to be out of the market when it does bounce back."
Strydom advises investors with offshore equity exposure to consider "bringing some back", to benefit from a rand trading above R16/$. Those invested in local equities should hold course if they can tolerate the risk — financial and emotional.
Absa capital investment strategist Ricardo Smith agrees: "If your financial objectives are long term ... then your investment strategy can’t be influenced by short-term events."