Your money in the time of Covid-19 – Part 2

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Although some markets – local as well as international – have bounced back from recent lows, volatility is the name of the game in the current uncertainty caused by the global impact of COVID-19. Many investors are not sure what to do, especially regarding the SA market. This is part 2 of Brenthurst Wealth’s series about investment issues in the time of COVID-19.

Prices of many shares on the JSE are now SO low, would it be prudent to accept the losses and divest (as far as is possible) from local assets and move money to cash or funds with offshore exposure? Or invest now because of low prices?

Five Certified Financial Planner® professionals of Brenthurst Wealth weigh in.

Brian Butchart: There are some quality listed companies on the JSE ALSI, but there is no simple answer to the question. Valuations are not the only consideration. An assessment of asset and sector allocation, global geographical spread and currency fluctuations should all be considered before making any decision to sell or buy, locally or internationally. Certain markets, sectors and asset classes may continue to struggle for multiple reasons while others offer potential growth opportunities and attractive yields at lower levels of risk. The JSE ALSI has shrunk considerably and is a tiny market with just over 600 listed companies to choose from. Other international markets offer compelling opportunities not available in SA and provides diversification, but needs to be weighed up against investment objectives, risk, income requirements and time horizons.

Sonia du Plessis: This matter will have to be considered on case by case scenario as each individual’s situation is unique, but yes if the investor only has exposure to SA Equities in his portfolio and no other asset classes then it would make sense to diversify some of the SA equities to other asset classes like Offshore Markets, local Cash & local Bonds.  The problem this investor is facing is that he is not sitting with a diversified portfolio, and he needs to diversify his funds.   By bringing in some offshore exposure he will give his portfolio alternative opportunities for growth.  The fact of the matter is that the SA economy still only makes up 1% or less of global GDP and the S-A Market is likely to take very long to recover from the pain inflicted by COVID-19 on an already struggling economy.  In saying that, there will however always be opportunities in any Equity market, therefore if you have cash sitting in the side, and you are willing to stomach still some volatility you can explore investing it a combination of Local and Offshore Equity market.  Not all stocks/asset classes are the same and you must do your homework before you invest.

Mags Heystek: Not all SA assets are bad, just like not all offshore assets are good. However, I do not think a meaningful recovery is likely in the medium term. Simply put, investors have made more money in rand terms with having offshore assets [see table]. Yes, there is always perceived value in the local market, but most investors do not have the time or expertise to comb through every single share on the JSE and understand the company structure, the dynamics of the industry in which it operates etc., to make a buy/sell decision. The SA economy is shrinking; it is unfortunate that it got hit with a double whammy at the same time (lockdown and downgrade).

The important question to ask pundits who claim the market (or any other market for that reason) is at opportunistic valuations, is why? If someone is recommending buying an asset (equity, property, cars, etc.) always ask why? Also ask yourself does that person benefit from my decision. I personally do not see any growth in any SA market for 2020. And there is also the struggling currency to consider – the rand is 35% lower for the year to 21 April 2020 compared to the previous year.

Desmond Benecke: The JSE now offers local investors opportunities to invest in quality companies not seen for many years. However, while a JSE price-earnings (P/E) multiple looks attractive at 14,28 compared to the US S&P 500  at 18,92, the macroeconomic environment within which South African companies operate is impeded by  government policy that is urgently in need of structural reform, inflexible labour policies and massive unemployment, which inhibits GDP growth. Global recovery will benefit companies operating in business-friendly environments in developed markets a lot earlier than in the developing world. South Africa is also not able to introduce the same stimulus into the local economy which developed economies are able to. Investors may want to consider exiting out of the JSE at depressed values (lower CGT) to gain offshore exposure at this time. The rand is unfortunately very weak currently, but currency considerations should not be all important when diversifying across geographies and currencies.

Where income is required, the local market offers attractive bond yields at CPI plus 6%, which cannot be found offshore. Important when living expenses have to be paid in ZAR.

Suzean Haumann: Each investor’s case is different and should be reviewed individually, on its own merits and background suited to the needs, investment term and risk profile of the individual. Investors who have been following a well-diversified strategy for the last couple of years with reduced exposure to local assets are likely not to benefit from any changes at this time. For some it may be the right time to sell and move into other asset classes, but I expect investors with well diversified portfolios will not need any changes. However, investors with a very high allocation to SA stocks (60%) have to cope with valuations well below the initial investment. Given the poor outlook for the local economy and thus the JSE, it may very well be in the investor’s interest to reduce this allocation, even though they might realise losses. Rather invest in other asset classes with a better outlook for future growth. Where it is “impossible” to reduce this allocation for whatever reason, they must accept that recovery is likely to be very slow and not significant for a long while.

A sound financial strategy should include multiple financial planning disciplines and not focus on investing and returns in isolation.

For information about a comprehensive financial planning strategy including asset allocation, risk planning, estate planning, tax planning, offshore investment and more Read here.

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