Are the doomsday preppers on the right page?

There is a series on DSTV called Doomsday Preppers. Naturally, the show is set in America and it follows the lives of people who are convinced that the end of the world is virtually upon them. Because of this, they are doing their upmost to prepare themselves to survive a doomsday event.

While many of us may think that these people are completely out of their minds, one particular episode did have a point. What if there was a terrorist attack, or series of attacks, that would be the catalyst for a global economic slowdown? A good example is the recent horrific attacks in France on the French satirical magazine Charlie Hebdo.

The effect on the populace

We are not here to argue idiologies, and we will not go into the logic behind the events which happened. But it was a calculated attack on many levels. Not only was there an immediate horror story, the deaths of the people who worked at the magazine, but there was a knock-on effect that was not as personal as the original attack.

Apart from the London Stock Exchange, the Euronext Paris (CAC 40) is one of the most important indexes on the European continent. It is also one of the major indexes in the world. In the aftermath of the Charlie Hebdo attacks, the CAC lost over 20 basis points and has been in decline ever since the attacks. This is bad news as France is a major investment destination for investors who are risk averse to investing in the US.

This is a similar situation that followed the 9/11 attacks in New York in 2001. The 9/11 attacks had both immediate and long-term economic impacts, some of which continue to this day. The attacks caused the Dow to drop more than 600 points.

Finding value in dark corners

While we may think that we are far removed from these events, Peter Dempsey, Deputy Chief Executive Office (CEO) at the Association of Savings and Investment South Africa (ASISA), pointed out that local investors keep a sharp eye on international markets and there is a trickle-down effect which ultimately lands in South Africa.

Investors are skittish by nature, and there are more than a few that follow the herd when there is a knee jerk reaction such as the one seen in France. Investors got frightened by the attacks and immediately pulled out a large portion of their investments out of the market. Some could say it was prudent in case the attacks were a prelude to a bigger event, but when the dust settled, money was not being put back into that market.

“When we see slow movements in the market, it becomes hard for fund managers to find value for customers where there is very little value to be had. True, this is an opportunity for fund managers to show their mettle, but they are caught in a very precarious situation,” said Dempsey.

The truth about regulation reform

One of the results of the 9/11 attacks was the expensive War on Terror where the US was hell bent on toppling regimes which were labelled as terrorist. This again had a significant effect on the US economy as it was one of the most expensive wars that the US had ever fought. It was also a precursor to the global financial crisis.

Following the crisis, there were many ministerial investigations into the fragility of certain sectors of global economies. Obviously the insurance industry in the US was under significant pressure during the 9/11 attacks and in the years after the attacks. The Fed decided to implement a series of reforms which it believed would strengthen the industry. Many other global markets followed and it is now South Africa’s turn to go through regulatory reform.

This is taking its toll on both the retirement and the life industries in South Africa. Dempsey pointed out that reform takes time to implement, and during that period, there is a lot of uncertainty as to which direction the winds of change are blowing.

“The industry is not sure what the outcome of regulatory reform will be. Because of this, there are a lot of focus groups being set up in companies which look at the possible outcomes of the reforms. However, this is taxing on companies as it involves the dedication of a lot of resources. These resources could be used for product development or generating new business,” said Dempsey.

Moving closer to home

While international events will have an impact on the local market, a more pressing concern is Eskom’s inability to keep the lights of the country on. When the African National Congress (ANC) took power in 1994, we were seeing economic growth of well over 6%, fast forward 20 years and we are lucky if our economy grows by 2%.

This is not only concerning for the country, but the insurance industry as a whole. Companies are experiencing either high levels of unemployment or low levels of salary increases. Because of this, the public is struggling to make ends meet, and insurance becomes a grudge purchase.

Again, this was not deliberate and was not unforeseen. In his Medium Term Budget Policy Statement last year, Finance Minister Nhlanhla Nene, said that we would need to make short-term sacrifices in order to achieve long-term gains. In laymen’s terms this means that we must all tighten our belts and apply the hand breaks to our spending habits.

This is where the true value of an adviser comes in. I have always believed that there is a solution available to every problem in the world, as long you approach the situation from an unemotional standpoint. The adviser is that standpoint. An adviser is able to sit down and make the hard decisions for families as they are not emotionally attached to the situation.

Editor’s Thoughts:
The famous Jeet Kune Do practitioner Bruce Lee once said that if we drop a pebble in the middle of the ocean, we are never quite sure how far the ripples will go. This is especially true in this day and age as a terror attack on a newspaper in France could be a catalyst for a major economic event. We need to be aware of this and prepare ourselves for these events to happen on a more frequent basis. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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