Tag: Robbie Goldsworthy

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Insights from Jeremy Gardiner on the impact of Covid on the markets

In Chinese Astrology, the year 2020 is the Year of the Rat. The rat is known for being inquisitive, shrewd, and resourceful, and is associated with new beginnings and renewals. This Year of the Rat has undoubtedly lived up to its name.

Recently, Jeremy Gardiner, from NinetyOne, shared his insights with the Chartered Wealth clients around the impact of Covid on both the global and local economy. In South Africa, we already had structural, social, and economic problems, and the repercussions of Covid-19 have made these stark realities even worse. Jeremy Gardiner, however, has a unique ability to point out the truths, dispel rumours and remind us what an incredible country we live in, something we are inclined to forget.

Global Impact

The major risks to the global economy are now inflation and debt. A staggering 18 Trillion dollars of stimulus has been injected into the global Fiscus, pushing global debt to GDP to a terrifying 322%.

With the impending US elections, it was noted that Jimmy Carter is the only President to be re-elected during an economic recession. Currently, the US unemployment rate is the highest in 80 years, with 20million people unemployed. With this in mind, Donald Trump has a mountain to overcome, and the initial polls are showing a 60%/40% split in favour of Joe Biden. From a planet perspective, Joe Biden is a better candidate, from a financial market’s perspective, a Trump victory is arguably a better outcome.

Local Impact

Consumer confidence dropped to a 35-year low, taking us back to 1985: a year when we were in the depths of Apartheid, the UN had imposed severe economic sanctions on us, and we were on the verge of a civil war.

From now on, South Africa needs policy certainty to spur growth. As much as 60% of our tax bill is funding salaries of government employees who make up 2% of the population. The government needs to push back harder on SOE funding and government wage bills.

Eskom is our most acute growth constraint. Like many problems in our country, the root cause can be traced back to the Jacob Zuma era. The Eskom budget is divided between maintenance and procurement – procurement has been preferential to maintenance because it is easier to corrupt. The end result for us is load shedding.

South Africa was forced to accept a loan from the IMF. Despite popular belief, this is a good thing. The repayment terms are 1% compared to 7% in the market, and we have to adhere to the emergency budget with a promise to cut government spending and tackle SOEs.

Cyril Ramaphosa rather courageously said, “the ANC does not stand alone in the dock on corruption, but it does stand as the accused number one”. The NPA is now independent, which means that should evidence of corruption emerge it is now challenging to prevent charges being lodged against anyone accused. This is a significant difference to the Zuma era. The wheels of justice are finally turning.

Apart from a few off-piste scenarios around the cigarette and alcohol ban, how have we dealt with this crisis? We have had 200 days of lockdown, resulting in 25% less virus-related deaths. Importantly, it must be noted that poverty also kills, and what is a more significant risk, Coronavirus, or an additional 3 million people without jobs?

Prescribed assets are very topical right now. The good news is there has been no mention of forcing fund managers to hold specific levels of government stock. They want the investments to be channelled on a voluntary basis – which is fine as long as it is properly structured and yields a competitive commercial return.

On a positive note, our Citrus growers are having a bumper year. Vitamin C is considered a solution to the virus. Our maize crops are also having a great year which brings down inflation. We do, however, need to resuscitate our tourism – we have to be brave and open up our borders.

From here on out, recovery is up to all of us. According to Sweden’s top scientist, the only reliable, proven way to combat a virus is to wash your hands and practise social distancing. We don’t have an unlimited printing press like the US and Europe. But we do have resilience which is engrained deep within our souls. We will rise above this, like we have before and come out a better, stronger nation, with the realisation that we are all human, and we are all vulnerable. Use this time to be with your loved ones and change things in your life that previously you may not have had the courage to do.

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COVID-19 Market Crash – Are we out of the woods?

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The year 2020 will undoubtedly go down in the history books for several reasons. By now, there are a few catchphrases that have become part and parcel of our everyday lives. These include: COVID-19, flattening the curve, quantitative easing, social distancing, herd immunity, second-wave, new normal, “you’re on mute”, “can you see my screen” and our personal favourite, “in these unprecedented times.”

In all seriousness though, these really are unprecedented times. In late December, rumblings of a virus in China began. Most of us didn’t give it a second thought, and the general expectation was that it would be contained, and have little or no impact on us. However, by the middle of February, COVID-19 had spread like wildfire across the globe causing fear and panic amongst both health professionals and financial markets. Leading into March, we saw one of the sharpest equity downturns in the last 100 years, as countries closed their borders and shut down their economies. For the first time, this market crash affected almost all asset classes. Oil futures contracts went negative for the first time in history. The Rand reached an all-time high of R19 to the dollar. Record after record was being broken, almost daily.

In the midst of this all, racial tensions in the US flared when George Floyd was brutally murdered at the hands of a white policeman. A social movement known as “Black Lives Matter” gripped the world as protestors took to the streets to voice their racial concerns and feelings.

What was widely expected to be a “U-shaped” (i.e. slow) market recovery has, in fact, turned out to be a “V-shaped” (i.e. fast) recovery. In the second quarter of 2020 markets rallied as investors weighed up the effect of the virus on global economies, versus the sheer weight and power of the various central bank’s stimulus packages. More than 8 trillion dollars were pumped into global financial markets in three short months. Today, markets around the world are almost back to levels that seen in January.

So, are we out of the woods?

While we have no crystal ball, the reality is that the world has not returned to normal, and both counties and companies still need to go through this fundamental shift of figuring out what this “new normal” entails. Some may survive, and some may fail. While China may beat us all to shifting back to positive growth (GDP) numbers, we suspect that a vaccine is the only route to finding our new form of whatever “normality” is. While there is a major race and competition going on in finding this vaccine, it is only likely to be ready next year sometime. Given all of this, it is hard to believe that we are out the woods.

Does that stop us from investing? No. There are still growth opportunities out there, and it simply means that we invest with caution, and there are various strategies to do so. This is something that you need to seek professional advice on.

So, yes, a record-breaking 2020 so far, and the year has certainly not turned out how we expected, in more ways than one. While we are on the road to recovery in terms of markets, and a vaccine seems to be in our reach, economies will take some time to fully recover and stabilise. The stimulus packages have been a saving grace to economies and markets; thus, for now, we bank the recent gains and wait to see what lies ahead.

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Cash vs Equity – Which investment carries more risk?

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There is no doubt that the year 2020 will go down in history for a number of reasons. When considering the stock market, it will never be forgotten. This year we saw one of the fastest and most aggressive equity downturns in the last 100 years, rivalled only by the 1929 stock market crash.

In late December and early January, the investment community began hearing rumblings of a virus in China that had local authorities slightly concerned. Most of us didn’t give it a second thought. By the middle of February, the virus, now known as Covid-19, had spread across the world, causing panic amongst health professionals and financial markets alike.

At one stage, a Bloomberg reporter said, “if it is listed on an exchange, it is being sold.” Not even Bonds, Gilts, Treasuries or Gold could escape the sell-off. Countries began closing their borders, and governments shut down business activity. Financial markets plummeted 30% or more as the global economy came to a grinding halt. It has been a stark reminder of how quickly equity markets can move against you. Many investors will be questioning the need to be invested in riskier assets. Is the risk worth the reward?

When asked the question “Which investment carries more risk – cash or stocks?” what would you be inclined to say? Stocks, most likely. The answer, Warren Buffett argued in a letter to his shareholders, is cash, hands down, without a doubt.

Many retirement investors think cash is a safer investment than equity. But, it should be the other way around. Due to inflation, a relentless force that destroys purchasing power, cash is the absolute loser.

The problem, Warren Buffet argues, is that investors, textbooks, and business schools incorrectly equate volatility with risk. While this makes for easy teaching, volatility is far from synonymous with risk, he says. Fluctuations in stock prices are not risk; they are opportunities. Risk should rather be defined as permanent loss of capital, caused by inflation. You cannot reverse inflation. But an investment in the equity market, while it may rise and fall, can reverse downturns, and yield a positive, real return. Buying publicly traded shares is not risk- free but avoiding stocks for the “safety” of cash is a mirage and dangerous for your retirement portfolio.

To preserve the long-term purchasing power of your wealth, investors need to generate a return that is equal to or preferably higher than inflation. In any given period, equities could underperform cash, but if your return requirement is more than cash can deliver, holding cash will guarantee that it falls short of this objective. With historically low-interest rates, investors need higher-risk strategies to achieve that required return.

In South Africa, however, over the last five years, cash has yielded higher returns than S.A equities. But over the longer term, stocks have significantly outperformed cash. We will never know for certain how equities might perform, but what we do know is that investing in cash will always cap your potential upside to no more than 2% above inflation.

A widely used stock market phrase says, “It is time in the market, not timing the market” that counts. It is often argued that for long -term investors, the most effective entry point is when headlines are gloomy, and the market is weak and cheap. Emotionally, this is easier said than done, and it is not easy fighting your cautious instinct. That is why, getting invested and staying invested through a balanced, globally diversified portfolio with a significant weighting to equities has consistently given clients a much better chance of preserving and growing their wealth throughout different economic cycles.

Your RetiremeantTM Specialist and Investment Consultant always take these factors into consideration when structuring your investments.

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