Category Investments

What's going on in the markets?

15 November 2011 OMAC Actuaries & Consultants
Windall Bekker

Windall Bekker

Windall Bekker, Head of Investment Consulting at OMAC Actuaries & Consultants, comments on current developments in world financial markets

Two important developments making headlines which have the potential to influence investors’ views on their investments. At times like this, it is crucially important to maintain regular communication with your retirement fund members so that they are able to make informed and rational decisions regarding their investments.

1. Moody Downgrades South Africa’s Credit Rating Outlook

The first major story likely to cause concern for investors is the recent downgrading of the South African Credit Rating outlook.South Africa’s credit-ratings outlook was lowered to negative by Moody’s, indicating it may downgrade the nation’s debt from an A3 rating, as “heightened political risk” and spending demands put pressure on public finances. The outlook was reduced from stable, Moody’s said in a statement today.

OMAC Actuaries & Consultants has noted over the past few months the expanded investment by government in the size of non-producing assets. We believe this has now reached the level where global investors interpret this as a risk to local growth in the future. Whilst only the rating outlook and not the actual credit rating for South Africa has been downgraded by Moody's, the consequence of the country’s debt-rating outlook being reduced is that the cost of borrowing by the government may increase in the future, further slowing growth prospects.

2. Eurozone Crisis

The second major issue concerning investors is the recent developments in the Eurozone crisis. We believe that there are now significant risks in Europe with Italy and Greece under extreme pressure. In this case, the key indicator that we watch is the Credit Default Swap (CDS) rates.

Italy’s key rate is now at the 7% level. This level is significant as the cost of repaying debt becomes very expensive above the 7% level. We expected the 7% level to be breached over the next 6 months, but it was breached within 48 hours. This shows the extreme level of fear and uncertainty currently in the global investment market. Furthermore, overnight CDS spreads show that Spanish rates also have spiked significantly - an indication of the rate at which the contagion risk is spreading.

What we recommend

Although the news in the last 24 hours is discouraging, it is in line with our expectations and part of the challenges of the existing economic climate. We expect that appropriate investment strategies would already cater for these developments and potential further risks.

Our view is that trustees should ensure there is sufficient downside protection in their investment portfolios, but allow for the opportunity to participate in a future upside. We recommend asset allocation, derivative overlay strategies and smoothing tools as some of the protective mechanisms trustees should consider.

Furthermore, many investors will be tempted to react to market panic and speculation around these media stories. However, we recommend that members be urged not to rush into adjusting their portfolio and investments as this could have unintended negative effects on their long-term savings goals.

The market is a function of cycles. This is a period in time that we believe will eventually pass and the markets will strengthen again. It is therefore recommended that members think very carefully before they make any changes to their long-term investment strategy.

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