In Africa, reactions to the onset of Covid-19 have been varied, from full lockdowns in most of Southern Africa, regional lockdowns in some West African countries and just social distancing and nighttime curfews in some countries. Official statistics suggest that most of Africa has managed to keep infections levels relatively low, so far. As a result of the different responses, the economic impact has also been varied across the continent, but due to the impact of the virus on the broader global economy, most African economies are facing severe strain. Time will tell, which response was the most appropriate for risk that countries faced from Covid-19.
The exchanged-traded fund (ETF) structure has led to increased investment options within fixed income, and the African markets are a clear example of this. Over the past few years, several African ETFs have been introduced to the market, tracking indices provided by S&P Dow Jones Indices in South Africa, Nigeria, and Namibia, giving investors options to participate in this investment space. With transparent indices and tight-knit local ties, S&P Dow Jones Indices and ETF providers have opened asset classes that historically were only accessible to large and more sophisticated investors. Market segments such as high yield, emerging markets, and international markets, which were inaccessible just a few years ago, have become an investment opportunity for all market participants. In addition to accessibility, the yields of African sovereign bonds have tended to be higher than both investment-grade and high-yield corporate bonds in the US.
The evidence is clear: starting valuations are a very important predictor of long-term returns. However, this insight gets lost in times of market panic when all the attention goes to reducing portfolio risk. The lowest risk way of achieving satisfactory long-term outcomes, is to buy assets at attractive valuations. Ironically, this is often an uncomfortable approach.
The human dimensions of the COVID-19 pandemic reach far beyond the critical health response. All aspects of our future will be affected - economic, social and developmental. Our response must be urgent, coordinated and on a global scale, and should immediately deliver help to those most in need.
We can make no clear conclusions on how much further markets may decline. We do know that this panic will subside but don’t know if it will accelerate before it subsides. Anyone claiming ability to be able to predict the future in this field has self-awareness issues. While many public market commentators and investment bank strategists were calling for a market correction, no one stated a respiratory virus and a Saudi-Russia oil price war would be the cause. Corrections are caused by things that we have not anticipated. Throughout my more institutional investment experience I have seen time and time again predictions about the future which were consistently and often significantly wrong. There is clearly a lot of uncertainty today. But there is always uncertainty. There was uncertainty in 2007. We just didn’t know it until 2008/09 came along and the uncertainty was suddenly reflected in asset prices.
Investors often focus disproportionately on share prices, to the detriment of a sound long-term investment strategy. It is easy to get caught up in the negativity and headlines that often drive share prices, rather than focusing on the fact that these shares are issued by robust, real-life companies that continue to bring in earnings despite challenging market conditions.
There will be no happy new year for Zimbabwe in 2020, with a general consensus that the country is more likely to worsen than improve by even the smallest measure. The key concerns that flow from that are the increased potential for instability and a continuing socio-economic decline that brings intensified challenges for the entire region – specifically neighbors South Africa and Botswana. Nor is there any prospect of a quick fix or even a medium-term improvement.
Growing political stability, domestic demand, and an abundance of natural resources means there’s no shortage of investor interest in Africa. As one indicator, foreign direct investment (FDI) into the region increased by 11% during 2018 – a clear exception to the downward trend globally. Yet while trade and investment opportunities abound, challenges remain, particularly with respect to currency reserves, export diversification and trade and payments infrastructure – not to mention broader economic stability.
The traditional private equity investment model is the blind pool fund, with investors committing capital to a fund for the manager to invest and divest at its discretion, in line with the fund’s investment policy. Whilst this fund model works for many, particularly for emerging managers, managers seeking to deepen their track record or those looking to build relationships with new investors, the option to use alternative models can help greatly. Further, there are growing numbers of investors seeking a greater degree of transparency and control over their investments.
There’s no denying that the current narrative in South Africa is negative. Investment returns have been poor for some time and there seems to be no light at the end of the tunnel appearing just yet. During times like these, emotions can run high and investors can make costly mistakes. It is therefore important to focus on your long-term goals to avoid making panic-driven decisions that could lead to losses down the road. The markets are tough, but remembering a few essentials should see you through.