The world is changing fast and to keep up you need local knowledge with global context.
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By Aidan Freswick*
Covid-19 hit the world economy like a hurricane this year and left no place untouched. In the “pre-Covid-19 Vaccine World” it has resulted in a market crash, and here are some of the effects of this crash:
- The ZAR/USD exchange rate:
In a short time, the Rand depreciated to a record low of around R19.10 to the USD, and this was off the back of investors selling off emerging market currencies, as confidence in markets suddenly decreased as the Covid-19 virus surged through the world. It could be said that fear of the unknown was the driver of this event.
- Instant devaluation in the stock market
On the 9th of March, the stock market experienced a so-called ‘black Monday’ where the JSE lost more than 12% of its’ value, and US stocks lost over 7.5% of its value, the worst day on Wall Street since the historic financial crisis of 2007/2008. This was a result of investors feeling the aftershock of the tremor and a decreased demand for stock market investments.
- Unemployment at highest rate
Covid-19 placed the world employment market into a certain form of lockdown, some countries more harshly than others, and this limited economies to produce goods and services. Certain sectors could enjoy remote working and other sectors were left completely without any form of income because of not being able to work. South Africa has experienced an unemployment rate of 30.1% in Q1, the highest rate since 2009.
These examples are few, yet very critical in understanding the impact of the global pandemic. There is always a bright side, though. The first talks of a trial vaccine in South Africa were announced on the 23rd of June by the South African Medical Research Council. November marks the month where vaccines have developed to be more than 90% effective, which is a huge success given the fact that the benchmark set by the World Health Organisation (WHO), is at 50% to be considered a ‘successful vaccine’.
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Besides the health benefit of a vaccine, this is how successful vaccines could impact markets and portfolios:
Demand for stocks and commodities:
As a successful vaccine becomes available and more importantly, accessible, it is possible to see investors demanding more stocks and commodities. Once the demand for stocks and commodities rise, the stock price generally increases simultaneously. What this means for investors, is that any wealth invested into markets would benefit from an increase in the prices of stocks and commodities in the form of capital growth within their portfolio.
A successful vaccine could positively influence foreign direct investment into South Africa. A ‘new norm’ would form as there would be a sense of normality in the way we do things. In theory, this could lead to a decrease in the unemployment rate as the demand for skilled and unskilled workers could increase as a result. Investors would generally be willing to take more risk.
Possible increase in economic activity:
As a result of businesses closing, and a rise in unemployment, the economic activity has declined significantly over the last year. A successful vaccine could be the start of a new era for businesses, which would have the capacity to produce more goods and services over time, and would result in an increase in GDP (a measure of production in an economy, such as South Africa). Increased GDP would result in more revenue collection by government, through SARS, which in turn will result in a healthier fiscal position for the local economy.
As we have seen over the last few weeks, the rand has improved significantly to below R15 levels against the USD, following a stagnant average price north of R16.50 to the USD. One could expect these levels of volatility in the short term as more news becomes available about a vaccine in South Africa and internationally, as well as new statistics around the entire pandemic and the global economic impact. If you refer to the volatility index below, the volatility levels are generally still high (above 20, where the average levels were between 10-18). Generally, when VIX levels are high, investors are not willing to take risks, volatility is noticed and there is a sense of uneasiness. A successful vaccine could result in a decline of the overall VIX levels which could indicate investors are willing to take more risk, as volatility in markets are reduced.
How could you best position your portfolio to counteract these risks:
If you think of airlines, and how many airline companies, unfortunately, could not keep their doors open due to Covid-19, you would imagine that it was a financial disaster for airline companies. Now, also imagine if all your wealth were invested into airline companies, the result would be that your capital disappeared into thin air. Therefore, it is important to diversify investments over various sectors and asset classes both locally and internationally.
Overall, a successful vaccine could be a driving factor that could positively enhance portfolio returns, as it has the potential to positively influence markets. The world is ever-changing, and it is best to move with the times. It would be a mistake to follow the old way of thinking, that markets will recover, and that the downturn is only short term. You may be right, but are you exploiting all opportunities to enhance portfolio returns? In the short term, it is close to impossible to accurately predict market behaviour and one can only follow fundamental statistics and the latest information made available. However, in the long term, it is of interest to learn from history and to best position investments to counter unforeseeable risks.
The events of the past year showed that any carefully made plans can be disrupted by an expected event of significant scale. The future will always be uncertain. It is advisable to navigate the challenges of investing in an uncertain market environment with the assistance of a qualified, experienced financial advisor.
Read more about financial planning.
- Aidan Freswick is a financial advisor based at Brenthurst Wealth Tyger Valley. [email protected].
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