Recent weeks have seen the local market hit by a triple whammy: both local and global markets have crashed as the economic impact of the Covid-19 pandemic begins to be felt resulting in a market sell-off; a rapid decline in oil prices has created a global supply shock; and on Friday evening last week ratings agency Moody’s downgraded South Africa’s credit rating to junk or sub-investment grade.
The market had already largely factored this latest downgrade into its pricing. South African government bonds have indicated that they have been priced for junk for quite some time. The Covid-19 pandemic has acted as the proverbial nail in the country’s economic coffin from a ratings perspective.
Here are a few ways principles to keep in mind when navigating markets in the current environment:
The markets typically do recover
From an investor’s perspective it is important to remember that markets have sold off before – and will undoubtedly do so again in the future – and also, most importantly, that they typically do recover. While the Covid-19 situation is in many ways unprecedented, market sell offs are not. In fact, they happen with regularity. Think back, for example, to the Great Financial Crisis (2008), The Dot Comm Bubble (2001), the South East Asian Crisis (1997) and the 1987 crash. In fact, we have seen traumatic market dislocations all the way back to the Great Depression in 1929 - and undoubtedly will again.
While the initial sell off in the JSE has been deep, and the ZAR has mirrored emerging market currency weakness, it is possible that when risk appetite returns to markets, countries like South Africa could well be the beneficiary of flows of money in the search of yield, given the aggressive cutting of interest rates the world over. The massive amount of money being pumped into the global system could well find its way out of traditional safe haven assets with near zero interest rates and aid in the recovery of asset classes which have sold off significantly in the “flight for safety” we have been witnessing.
Reconsider exiting the market
Recent market volatility will understandably leave many investors jittery. The danger posed for those who decide to exit the market until it shows signs of recovery is that there is no indication of when prices have hit rock bottom. Market recoveries can occur relatively quickly from the bottom of a sell-off and those investors who miss it will often find it difficult to re-enter the market. And if investors are not able to benefit from an upturn, they won’t be able to recoup their losses. As an example, the recent sell off of the S&P500 was the fastest 30% move that we have ever seen. Yet the period from 24 March to 26 March represented the biggest three day gain on that index since the Great Depression.
Around the world central banks and federal reserves are starting to step in with both fiscal and monetary policy in an effort to stimulate markets. These responses are at some point likely to make an impact, and the risk for investors trying to time markets is that they may well capitalize losses, and then be out of the market during a recovery.
Keep the risks in mind
Those investors currently weighing up their options of whether or not to remain invested need to remember the inherent risks in exiting the market given the fact that interest rates are currently low – and are predicted to fall even further both locally and in other jurisdictions – which means that parking money in cash or safe haven assets may not be an attractive long-term option. As such, exiting markets to sit in cash moves investors into a “market timing” type of strategy, and this is a very difficult thing to do.
It is vital to remove emotional or knee-jerk reactions to market volatility. A better approach is to have a long term investment strategy in place, and structure portfolios both to appropriately reflect the risk tolerance of the investor and to enable it to absorb volatility over time.
The best advice for investors in the current environment is to hold off from any unnecessary sales and to remember that market dislocations create opportunity. In short, beware of acting reactively. Instead, take a long-term view and remember that markets typically do recover over time.
Andrew Duvenage is the Managing Director at NFB Private Wealth Management.