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What’s ahead for financial markets?

25 June 2020 PSG Wealth

Volatility returned to financial markets in 2020 due to various events, including the COVID-19 pandemic, the oil price war and credit rating downgrades.

“The path ahead remains highly uncertain, but emerging markets may be more resilient than many people anticipate,” says Adriaan Pask, CIO at PSG Wealth. He outlines some possible outcomes.

1. Unemployment numbers will rise
The South African Chamber of Commerce and Industry has warned that SA’s unemployment could peak at as much as 50%, particularly due to the impact of lockdowns to contain the spread of COVID-19. National Treasury anticipates that more than 2.5 million jobs could be erased, with wages and salaries expected to fall by as much as 30%. SA’s unemployment rate for the first quarter of 2020 - before the national lockdown – rose by a percentage point to 30.1%.

These numbers will increase in the second quarter. “It may take a few years to get the unemployment rate to revert to pre-crisis levels, but we expect these numbers to normalise in the long term,” says Pask. It is also important to note that this prevailing rise in unemployment is not just a distinctively South African problem, but a global one.

2. The IMF expects emerging markets to be more resilient than developed markets
The growth of the Chinese and Indian economies will drive the global rebound after 2020 according to the IMF, which predicts emerging markets (EM) and developing economies to rise just below 5% in the medium term. According to the report, the prospect of a weaker US dollar and low interest rates globally will allow key central banks of EM countries to be more aggressive with their monetary easing. “EMs are expected to recover in the years ahead and potentially outperform the US stock market,” says Pask. “With a lower cost of capital, private sector investment will also likely recover.”

3. On the JSE, short term spikes smooth out over time
When tracking the movements of the ALSI over the past 24 years, we can see how short-term spikes similar to those prompted by the global pandemic smooth out over time. This indicates that while these short-term spikes may be painful, they have a smaller impact on the upward trajectory of investments over the long term.

In retrospect, SA has dealt with its fair share of headwinds over the past 15 years. The 2008 GFC and the COVID-19 pandemic have caused the largest market pullbacks in recent history. The impact of the strong US dollar has also placed massive strain on EM economies and investments, and SA was no exception. Political turmoil in the country added an element of uncertainty, which has also placed considerable strain on both business and consumer confidence.

Yet, despite this, equity markets have been able to deliver a return of 13%.

“This is in line with our forecast for the period of inflation plus 7% for this asset class,” says Pask. “This illustrates why long-term investing is important, but also that the assumption remains realistic, even being aware that various challenges will be experienced over the investment term.”

Keep your eyes on the long-term goal
“Reacting to short-term noise isn’t helpful,” says Pask. “Market volatility is part and parcel of any full investment cycle. A good investor anticipates and prepares for some level of turbulence along the journey, and remains focused on their long-term objectives.”

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