Inside Covid-19: Following the smart money; rock star economists on where we’re heading – Ep 11

In episode eleven of Inside Covid-19, we hear how the smart money is playing the investment markets; a special treat as two rock star economists (Mariana Mazzucato and Martin Wolf) share how the world will change through Covid-19; the WHO shatters the myth of the virus only killing the elderly; a potential breakthrough in treatment through transfusions of the plasma of the previously infected; and smart investors are accumulating shares of Cloud and online retail companies. – Alec Hogg

First in the Covid-19 headlines today:

  • Deaths rose above 50,000 Thursday with a quarter of those in Italy and a fifth in Spain. French mortalities hit 4,000 on Thursday, overtaking China as the third hardest hit nation. Confirmed global infections are on the verge of rising above a million, having increased 9% yesterday to 965,000 according to data compiled by Johns Hopkins University. At around 220,000, the US has twice as many confirmed infections as Italy and Spain. On the upside, around a fifth of those infected have now recovered, with 75,000 of them in China. South Africa’s confirmed cases on Wednesday were officially 1,380, up a modest 27 on the previous day.
  • Covid-19 is proving the final straw for many previously struggling businesses. Famous Brands announced Thursday that it is cutting off any further funding to the UK hamburger franchise Gourmet Burger Kitchen, acquired three and a half years ago for R2.1bn. Also teetering is South Africa’s horse racing industry whose listed company Phumelela says its revenue has fallen to virtually zero and once the crisis is past it will be forced to substantially reduce stakes available for those ultimately funding the industry, the racehorse owners.
  • US unemployment queues doubled by a new record of 6.6m this week after a 15-fold surge the week before, taking the growth in a fortnight to 10m workers. During 2008’s Global Financial Crisis it took 19 weeks for a similar increase in America’s unemployed. The Covid-19 crisis, however has seen a massive swing to digitally-based businesses with online shopping giant having hired 80,000 new workers since the virus first hit the US. Amazon is America’s second largest employer with over 500,000 staff.
  • As we get a better understanding about Covid-19, the more we realise previously held beliefs were wrong. Take the widely held perception that it is only the elderly who are at risk. The World Health Organisation has now exposed that myth, warning data shows this is actually not true – younger people are dying too. This has particular implications for Africa whose youthful demographics suggested it was relatively immune.
Given its business model of allocating funds to the country’s best money managers, Discovery Invest’s MD Kenny Robson has access to some of South Africa’s most insightful investment minds. In this fascinating interview he shares what the smart money is doing – and which businesses are being hardest hit by the war against Covid-19.

Restaurants are collapsing everywhere as the world is realising that we’re all in lockdown. It’ll be interesting to see which of these companies or chains can come back after all of this. We’re in for a bit of a slog stop.

Anything that seemed to be in trouble or struggling or sailing close to the wind, ahead of Covid-19, is now really taking strain.

Absolutely. You have to separate South Africa from the rest of the world, because even before Covid-19, our stock market had very little equity growth, or nothing over a five year period. Our economy has been struggling for a long time and this is the final straw for many companies. Companies need to worry less about earnings at the moment and worry more about coming out of this alive with their balance sheets intact.

Everyone expects that earnings from companies across the world are going to be impacted negatively. Some standout companies may benefit from an environment like this, but in general companies are still in for a rough time.

How are the Discovery investors reacting to this? Are they panicking or are they just holding tight?

We haven’t seen that much panic to be honest. I think it’s worth pointing out that even before Covid-19 – if you looked at the Unit Trust statistics in South Africa – it’s really been a risk environment for the last two years. Most of the flows have been going into income fund money markets as opposed to the market.

South Africans have been conservative and cautious over the last two years – largely around the downgrade risk – which is obviously now a reality including concerns around Eskom and other state-owned enterprises.

A lot of people over the last year, have moved quite a bit into more conservative investments. In Discovery most of our Unit Trusts products have held up quite well. Discovery happens to be one of the top takers of flows in the industry and we haven’t seen that much panic at all. Over the last two weeks, a lot more requests have come from people to take contribution holidays on a recurring contribution product. In other words, if you’re paying every month into a retirement annuity, people have said, ‘times are tough at the moment can we take a 3 or a 6 month break on those contributions. There are rules around taking those contribution holidays, what it means is the average person in the street is feeling the economic bite at the moment.

We would rather give them a contribution holiday than lapse their entire investment, effectively discarding the strategy that they were building for their retirement. People are not too rattled at the moment. We’re saying to people that if you’re in the markets at this point in time, to sell would just really be turning your paper losses into real losses. It’s not the time to sell out unless of course you are holding one or two counters that are just bad quality and are not going to come back from this.

We are telling people to hang tight. We’ve seen from every market crash that’s happened historically – whether it takes 3 months or 3 years – which is really the sort of the time span after the various previous crashes to recover. We know it will come right again. The same company that you were buying three months ago, if you thought Apple was a great share three months ago, their sales will be depressed for a period of time. It’s still a great company and therefore to sell it out that these types of levels would be crazy.

So, I think it’s hard to say if it’s hit a bottom or how much further down it can go, it’s way down from its historical levels and many people are seeing this as a buying opportunity.

People like Warren Buffet and investors like that are choosing their investments very carefully at the moment. The other point we’re making to clients is that it’s not time for passive investing and just not buying the index, because an index is made up of a lot of shares. Some are going to be good and some are going to be bad and what happens in a crash is everything is decimated. It’s time now to be picking specific shares  and making sure you are going for quality as opposed to just the general index.

I’m quite interested that you mentioned Apple. There was a report today that since the Covid-19 crisis, Amazon has hired 80,000 people and the share price has gone up. Apple is actually holding up quite well. From the investor’s perspective, when you talk about risk in South Africa, were they prepared to take risk internationally? Was money actually flying offshore?

The money was flying off shore. The period before Covid-19, the American market was probably the only market that was really up over the previous five years, shares like Apple, Tesla were hitting all-time highs.  Some people thought those valuations were very heavy but nonetheless, there was a lot of appetite for American equity over the same 5 year period. If you look across Europe and the UK, the FTSE in the European indices were flat or slightly negative. The only other market over 5 years that showed some sort of gain was Japan. It showed roughly about a 20% growth which is not really that much in reality per annum. At the moment in South Africa, interest rates are fairly high, so you can still be in a money market or an income type of fund and be earning 7-8%, prior to tax.

But nonetheless, that’s a pretty good yield in an uncertain market. Whereas in the US interest rates are close to 0%. With low interest rate environments, people have more appetite for equity because that’s the only place they could get return. My gut feeling is, markets will bounce back from this – obviously one can’t determine how long this Covid-19 will prevail – but markets tend to come back from all of this. People have to stick with their longer-term strategies and wait it out for markets to recover.

You’ve obviously got good connections with the best money managers in the country and presumably some internationally as well, what are these experts telling you and telling us by definition?

The view tends to be to stick with your current strategies.

A lot of the selling that happened we believe was algorithmic. Once the index starts selling off, everything sells off as opposed to people just selling individual shares here and there. The international markets are so dominated by the ETF and the passive space, that the sell off happens very quickly. This has been one of the quickest sell-offs that we’ve ever seen but most of them are talking about certain opportunities. They tend to be picking out certain shares which they believe will do well in this environment. You’ve seen some of the hedge fund managers signalling certain opportunities.

The S&P 500 is sitting at a level where it was lost at this level in mid 2017 year. To date, it’s over 22% down. The asset managers are starting to talk about opportunities and thinking about how to position their portfolios to come out of this.

In the South African space, most of them anticipated the downgrade whilst they didn’t think it would necessarily happen now – they thought it would happen later in the year – nonetheless, they were positioning their portfolios for a potential downgrade. It’s time for the braves to look for some opportunities. 

Those people are putting money into month-end products. They’re buying more units for their money now – they’re buying them at low prices – which is a good opportunity to me in terms of your wealth accumulation.

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