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Expect wild swings in asset prices to continue on elevated market risk

03 April 2020 Novare Investments

Take a longer-term perspective to avoid costly knee-jerk investment decisions

As countries globally continue to count COVID-19 infection rates and mortality figures attributable to the pandemic, the elevated level of risk being experienced in financial markets may be sustained for periods longer that initially envisaged - leaving investors vulnerable to volatility and implying that decisions to enter or exit markets might be postponed until more stable conditions return.

Benedict Mongalo, Chief Investment Officer at leading independent fund manager, Novare Investments, commented: “Investors in South Africa and globally have over recent months faced a daunting array of risks that are impacting asset prices in different ways, complicating investment decisions and raising the chances of financial losses.”

He added that, while predictable risks like the possibility of Moody’s Investors Service downgrading South Africa to “junk” tend to some extent to be reflected in asset prices in advance, unknown and unpredictable risks like the coronavirus are inclined to cause short-term shocks in capital markets.

These events are taking place against the background of one of the longest equity market bull runs ever. Some analysts argued that one reason the coronavirus initially had such a huge impact on markets was because nervous investors saw it as an opportunity to reduce their exposure to asset prices that had run too far in the global equities rally.

“During periods of heightened volatility and uncertainty, historically emerging markets including South Africa are normally not spared as investors look for what are deemed safe assets. While the pandemic has not yet been as prevalent in South Africa, the country has been impacted by various adverse events including a significant economic slowdown in its main trading partner China, and now the credit rating downgrade by Moody’s which firmly places the country as a sub-investment grade sovereign.

“Accordingly, the rand has come under pressure, and with the rebasing of the world indices at the end of April 2020, it is expected that the currency might experience even further pressure. The country is expected to exit the FTSE World Government Bond Index which may trigger capital outflows as global investors tracking the index are forced to sell,” said Mongalo.

Looking ahead at prospects for the rand, analysts have said that they’re less concerned about domestic developments than they are about international events.

All major global stock indices experienced significant sell-offs during March as the pandemic spread. Despite unprecedented fiscal and monetary intervention by central banks, markets remain volatile suggesting that recovery may be prolonged for a relatively longer period.

Said Mongalo: “All investments carry some risk, which is inherent in capital markets. We know that risk should be commensurate with reward and that markets traverse various economic cycles. Controlling risk is key to every good investment strategy and the use of mitigants like diversification, rand-cost averaging and taking risks in line with the investment horizon are some of the key considerations.

“Investors should stick to their investment objectives, avoiding short-term knee-jerk reactions to perceived market risks, whether expected or unannounced. For investors in stocks especially, withstanding short-term price fluctuations often generates superior long-term returns.”

Quick Polls

QUESTION

Covid-19 may accelerate certain industry trends. What are we likely to see?

ANSWER

Adoption of contactless technologies and digital experiences will likely be accelerating emerging technologies further
The consumer will expect safety and precautionary measures, driving the need for enhanced surveillance policies and technologies, which may pose potential privacy concerns
Rising activism among consumers and employees could drive an increased focus on corporate purpose
Value chain disruption is likely to lead to an increase in creative partnerships, which may in turn cause organisations to further invest in developing the mindset and agility to collaborate across sectors in the ecosystem
Cost management will be a critical priority to ensure business continuity based on cash flow requirements, to manage lower margins and revenues during a downturn
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