ANET AHERN: Surviving a world on fire
All crises involve both a change and a return to normal — but the new normal will be entirely different to how things were before
My late mother was profoundly affected by the Great Depression of the 1930s. She recalled how it altered the way her parents saw food entirely. The depression changed consumption patterns for generations, even if the US economy rebounded in leaps of 10%-19% during the 1940s.
It illustrates how crises involve both a change and a return to normal — even if that new normal is entirely different to what came before.
Two decades after the Great Depression, there was an economic boom. Infrastructure spending soared and consumerism reigned. It’s no coincidence that the credit card was born in the 1950s. A military approach to balancing the books and an extension of social grants were features of this growth. Some of these tools are still used in the huge stimulus packages of today.
After the global financial crisis of 2008, there was a wholesale restructuring of financial institutions. The intensified scrutiny of these institutions is still in place today. And while US economic growth shrank almost 3% in 2009, it rebounded by 3% in 2010.
In each of these crises, policymakers had a combination of levers they could pull — fiscal stimulus, rate cuts, letting inflation rise or extending social grants.
SA is especially challenged by the Covid-19 crisis. We went into it in a fragile state, with low growth, high unemployment and a large budget deficit. We do, however, have some things in our favour: a well-functioning Reserve Bank and finance department, low inflation, long maturity on our government debt burden and high real yields.
SA has already pulled the interest rate lever twice, but we haven’t seen much impact yet due to the lockdown. Given the outlook for inflation, there may be more scope for lowering rates.
The rand has played its role as a shock absorber for the risk-off sentiment, having weakened to about R18.70 at the time of writing. While this adds to the expense of offshore debt (we don’t have much), it will also play into the hands of exporters and local manufacturers.
The government also acted early to contain the situation. This week, SA ranked about 90th in terms of deaths relative to population, according to the Statista data platform.
However, this has come at a cost. Sadly, the International Monetary Fund ranks our forecast economic decline for 2020 at 12th in the world, in line with the -5.9% contraction predicted for the US. We are also likely to see our budget deficit widen to 13%.
The response of the JSE has been sharp and swift. It is, remarkably, the fastest 30% decline in history, and we’ve already had some spectacular price recoveries too.
The current market has the hallmarks of an event-driven bear market — it’s typically sharp and shorter in duration than a structural event, such as the 2008 crisis.
Unfortunately, a large drawdown always brings structural fault lines to the surface, and that is where reform, restructuring and reratings are likely at a country, industry and company level. Let’s hope this crisis clears the way for some hard, corrective action.
So what can we expect if we wind the clock forward a year? A lot of incorrect predictions, including some I’m making here.
A well-diversified portfolio with some built-in flexibility and the right long-term risk profile might do best if largely left alone. But even a low-risk solution is likely to be more volatile than we are used to.
Sequencing risk (the impact of a market decline close to retirement) will have spiked, leading to adjustments in living standards, delaying retirement dates and lowering expectations of living annuity payouts.
The rand is likely to continue to be the buffer for sentiment and emerging market flows, and it could stay cheap and erratic for a while longer.
What we’ve seen so far has mostly been a demand shock as we shut down entire economies. The impact of the supply side, with capacity and competition taken out of the market, will only be felt in the months to come.
Back in the 1980s, when SA had sanctions, replacing imports was a strong investment theme.
We could see a similar boost for local manufacturers now, given the slowdown in international trade and the weak rand.
We should see the impact on our pockets of lower interest rates, lower oil prices, some return of business activity and lower inflation, and there may be a post-lockdown spending burst.
Return-on-investment calculations will need to work off a sustained lower base of inflation. The risk of reinvesting will become a bigger issue, as the impact of lower interest rates is felt. Though cash will feel good, as an asset class it will struggle to build returns well above inflation in the longer term. This is where judicious rebalancing to a strategic asset allocation plan can pay off.
Sadly, many more people will die and more businesses will close. This will take an emotional toll that, together with uncertainty, may make us vulnerable to irrational decision-making.
Three times in the past 30 years, a mountain fire has threatened my home in Cape Town. Each time, I ended up almost evacuating. And each time, I was amazed at how little I deemed really valuable in that moment.
But there’s something else I can say about mountain fires. The undergrowth always grows back — and it does so surprisingly quickly. I’m looking forward to seeing the first green shoots when the lockdown lifts.
- Ahern is CEO of PSG Asset Management