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Rationality must take centre stage

11 May 2017 Jonathan Faurie

Many of the people that I engage with, both personally and professionally, have expressed their worries about how the recent credit downgrade will affect them.The majority of these people have described meetings with their Certified Financial Planners (CFP) as sobering encounters as the message regarding the eradication of manageable amounts of debt is clear. If you can pay off your debt …do it as soon as possible.

The coming storm

Godfry Nti, CEO of the Financial Planning Institute, warns that we must not underestimate the pressure that may be coming our way.

“Economic storm clouds are gathering. More and more analysts and investment strategist are mentioning the dreaded recession word, and are talking about higher inflation ahead. Further, there may be interest rate increases on the horizon. It is an alarming situation, but consumers and investors will survive the troubled times if they approach their finances with prudence,” says Nti.

He adds that South Africans are heavily in debt. They are indebted to such an extent that some have started to pawn assets to keep cash flow going. One of the key coping mechanisms is to consult with a CFP to gain expert advice; however, many think that it is only the wealthy or top earners who can access financial advice.

Panic mongers

In a release to the media, George Herman, Citadel Chief Investment Officer, discussed a recent Bloomberg article and how it had the potential to cause panic among the public.

"The Bloomberg news agency recently published an article stating that South African bonds were now seemingly junk – a word which is loaded with negative sentiments. In turbulent times such as these, it is essential to remain calm and objective, and not to become embroiled in such emotional judgements. Ask yourself: were South African bonds junk towards the beginning of April? No. Has our probability of default increased meaningfully since then? The answer, again, is no,” said Herman.

The Bloomberg article made reference to the recent credit rating downgrades to sub-investment grade by Standard & Poor’s and Fitch, a level often touted as junk. Junk, however, is not the word used by the credit agencies, but merely a label developed among regulated investors who are not permitted to invest beyond investment grade securities or countries. And yet the word carries tremendous weight and emotional currency, most of which is an inaccurate reflection of what investment grade or sub-investment grade actually means.

Negligible difference

Citadel’s release adds that the attractiveness of an investment is determined by the objective of a client or investor and the mandate the client has given the financial manager. That mandate may exclude many countries or asset classes and that exclusion doesn’t make those particular investments junk.

“Global investment firms require an independent, objective party to rate or score the entire global fixed income investment universe. Their mandates are then set up to include only investments higher than a specific score and this universe of investments is then investable for them. Over the years regulations for global pension funds have been standardised and, in so doing, this has created what is now known as the investment grade universe,” said Herman.

Herman insists that the above is merely a line in the sand, since a distinction or limit needs to be set somewhere. “On the continuum of risk, the difference between the lowest ranked security in investment grade and the highest ranked security in the non-investment grade list is absolutely marginal and most definitely not as binary as the inclusion or exclusion would suggest,” said Herman who adds that the one investment can’t be described as perfectly acceptable while the next as junk. It is merely outside the predetermined universe of a certain set of investors.

Coping mechanisms

Despite Herman’s positivism, we do find ourselves in turbulent times. David Kop CFP, Head of Advocacy at the FPI, said that there are a few basic steps that any person can take to avoid the worst impacts of a downgrade. Advisers are their clients superheroes in these situations and simple activities such as drawing up a budget, creating a financial plan, helping to plan for retirement, saving for a rainy day and encouraging clients not to follow the herd will earn some brownie points when it matters most.

“Many people have no idea what they spend on beyond the big expenses like bonds or rent, motor financing, insurance and medical aid. It is important not to overextend ourselves during this time,” Kop says.

Editor’s Thoughts:
Kop also made an urgent plea for people not to be herd animals. The situation of your clients is unique, a blanket offering cannot be offered to all. That being said, there seems to be some hope during these dark times. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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