by Ashley Horwitz
We trust you are doing well and that you are taking all the necessary precautions regarding the Coronavirus pandemic. We have just walked out of an Investment Committee Meeting and obviously the discussion centered on the market volatility currently being experienced.
Whist we will break down the full impact of March’s volatility during the month of April, we thought it best to focus on sharing the views of our asset managers at this time.
Global stock markets crashed last week and are, on average, down between 15% and 30%, depending on which indices you use and how you measure these. At the same time, the rand vs US dollar exchange rate has weakened by 15% YTD, cushioning some of blow (if you measure your wealth in rand terms).
Anchor Capital has provided a view on the Rand indicating that although the currency can still weaken further R14.20 is their predicted fair price on the US Dollar.
These events have been caused by two black swan events – the worsening of the novel coronavirus (COVID-19) and the widely unanticipated Russian assault on the oil price. Both will resolve themselves in time.
The 30% drop in the oil price YTD is exactly the opposite of what most forecasters predicted at the beginning of this year. An oil price at around the US$30/bbl level has seldom been seen in the last 15 years.
This is below break-even level for many producers and it simply has to and will correct. For the time being, the lower input prices for companies that have fuel as an input cost is a positive.
The big question being debated across the globe is what is priced in, and whether the next big leg will be up or down. The reality is nobody has any idea in the very short term.
Generally, Fund managers are not selling in panic, with a focus on the long-term returns. However, we can be certain that the short term will be massively volatile, and it is not for the faint hearted.
In an analysis conducted by Stanlib Multi-Manager. The Fund management industry have the following to say on the current state of the market:
- They are not panicking,
- They have become more cautious and are taking some risk off at the margin,
- They have increased cash levels and reduced net equity exposure,
- They are positioned for continued volatility,
- They are sticking to their philosophy and process to guide their long-term approach to investing,
- They are starting to see some interesting opportunities and mispricing of assets.
- Specifically, Coronation reduced their weighting to Richemont, which is heavily exposed to the Chinese consumer and bought put options on the S&P 500 at higher levels.
- Allan Gray reduced equity exposure into the build-up of volatility.
- Melville Douglas has been looking to switch cheap for cheap quality at the margin.
- Investec has been topping off the winners and rotating into quality shares that have fallen into value territory.
- ABAX has been looking to opportunistically trade mispriced companies.
- PIMCO: focusing on liquidity, having lower beta to corporate credit, and rotating into quality
- Amundi: maintaining long duration positions whilst keeping portfolio hedges in place, rotating into haven currencies such as the yen and slightly increasing cash levels in their portfolio
- Veritas: increased cash levels to above 10% prior to the collapse on valuation concerns and scouring their “best ideas” list of higher quality companies that are now cheaper
The reality is that markets are not logical and actions by authorities can have a massive impact on them. Expect stimulus packages and loose monetary policies, including possibly from SA. This can result in big market bounces.
For long-term investors who do not wish to draw cash, this is becoming a great opportunity, but fortitude is required. For those investors who are relying on income from their investments, we can assure you that we have done everything in our power to position your portfolio for market downturns.
- Volatility is an inevitable part of investing; a necessary evil and investors must always be prepared to ride the ups and downs.
- Keeping everything in cash may feel secure in the short term but keeping too much in the longer term is likely to be a poor decision. Inflation could gradually erode its spending power.
- Through compounding more volatile stock market returns, and ignoring short-term noise, you give yourself a better chance of meeting long-term financial goals.
- Most importantly, don’t make changes in haste.
As always, our professional Financial Planners are available to deal with any queries in this regard.
We wish you all of the best.