Every 75 to 100 years, an event occurs that will forever define how generations to come live. This is our Black Swan event. According to Ray Dalio (legendary hedge fund investor) we are entering a global depression, not unlike what the world experienced in 1929 (hopefully cushioned by the various monetary and fiscal initiatives by the various governments). Many would say this is self-inflicted, i.e. this was not a systemic failure of capitalism but a choice of lives over livelihoods. How we react will largely define how well we emerge from this. Nothing will be the same again, hence we cannot go on with business as usual.
It is tempting to only see the negatives when it comes to South Africa (and other emerging markets), but when it comes to local sovereign bonds, there are several positive developments being overlooked in this time of fear.
Much has been said about the impact of COVID-19 on the global economy, and more frequently, it is beginning to be known as the worst recession since the Great Depression. Although we do not know how long the COVID-19 pandemic will continue to hurt the global economy, we do know that, at least at some point, things will normalise. It may be a ‘new normal’, but to some extent most industries will see a strengthening of demand and with it a revival of some much needed cashflow.
The COVID-19 outbreak has plunged the globe into chaos. We are in uncharted territory, from both a societal and a financial market perspective, and trying to predict outcomes is virtually impossible.
Despite current circumstances - dominated by the human and economic cost of Covid-19 - the African real estate investment cycle will return to its long-term trajectory of accelerated development, driven by economic fundamentals and demographics.
Slow Covid-19 economic recovery compels African companies to adapt fast to new consumption and trade patterns
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.
Tollymore has developed six behavioural constraints impairing institutional money managers’ execution of a sound long term investment programme
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.
Africa cannot go back to ‘business as usual’ when COVID-19 pandemic is over, writes Babatunde Omilola, Manager for Public Health, Security and Nutrition Division at the African Development Bank
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.
Clients often ask us what the catalysts for outperformance will be. Sometimes this refers to outperformance of our funds, and other times to the South African economy as a whole.