Communicating the big picture of investments pertinent to avoid damaging financial decisions
10 October 2013 | Investments | General | Nicky Weimar, Nedbank
The current US government shut down and South Africa’s ailing exports and production industries are factors that have the potential to send overwhelmingly confusing signals to local investors. Communicating the effects of short-term market shocks and hype to retirement fund members - who need context of the big-picture economy - is crucial in order to avoid panic which may potentially lead to members changing between investments, as well as impact their long-term plans to retire comfortably.
Speaking at the Nedgroup Investments Knowledge Breakfast, Nicky Weimar: Senior Economist at the Nedbank Group Economic Unit says that the partisanship and polarisation in the US economy over the agreement of the health-care initiative known as "Obamacare”, to fund federal agencies - which have in effect led to the first government shut down in 17 years – may have a calamitous outcome for South Africa and the rest of the globe.
Weimar explains that the US, which is known to be the lowest risk country and which is the basis for all currencies and commodity prices, has 8 days to come to an agreement until all emergency funding runs out. She says that if by this time they cannot pass the budget and agree to push up the debt ceiling the outcome will be default, which will have far reaching impacts on the global financial market, pricing and risk perception.
"Should this be the case there are a number of risk factors that South Africa needs to be aware of, such as the effect on the Rand.”
Weimar says that in effect the South African economy will be placed under more strain than it already is. "There are currently many issues that are straining the local economy – primarily on the export and production front. Industries that are holding the economy back include the manufacturing and mining sectors and utilities.
"Another factor that is putting South Africa’s economy under strain is the loss of international competitiveness due to surging production costs, run away electricity costs, rising unit labour costs attributed to above-inflation wage growth, fading productivity, more and violent strikes, insufficient power, transport, logistics infrastructure, poor service delivery, red tape and corruption.”
She argues that high electricity prices and lack of power capacity are major constraints on the economy and are hurting industries that are heavily dependent on energy, like the mining and manufacturing sectors.
Against this backdrop, Vuyo Nogantshi, Head of Institutional Business at Nedgroup Investments, warns that negative news headlines, can also prompt investors to change their investment decisions irrationally, which could have a devastating effect on their retirement savings.
"The most significant factor in terms of one’s ability to retire in comfort is staying invested for the long-term. Chopping and changing between investments, as well as wholesale withdrawals from investments, as a result of key life events or changing jobs, can have devastating effects on one’s retirement savings.”
He says that generally, members’ required investment returns at any given moment are driven by their perceptions and interpretations of economic factors at play at that time. "In order to avoid panic and pressure from members on decision-makers to implement damaging short-term changes to retirement investments, members need context of the big-picture economy and any communication they receive must explain this in the context of their investments’ long-term performance.”
Nogantshi says that by contextualising what members require to retire comfortably, relative to what is being achieved in the market, trustees and other advisors will be able to offer assurance that members’ long-term savings goals are achievable in spite of a short-term dip in performance.
"By efficiently communicating the current situation and focusing on what it means for the long-term, members are able to make informed, rational decisions regarding their investments. If however, communication happens infrequently, is poorly structured and members are forced to make their own assessments, it will likely have a negatively influence on retirement savings,” he concludes.
