FINANCES: NOW IS THE TIME TO TAKE A LONG-TERM VIEW

According to Moody’s, some of the main factors damaging South Africa’s economic growth can be attributed to poor governance of state-owned enterprises, the lack of a steady supply in electricity, widespread corruption of the Zuma administration, and weak investor confidence. Along with the Covid-19 pandemic, which was the final nail in the junk status coffin!

The downgrade will have a severe impact and many South Africans who were planning to retire in more or less 10 years may have to work longer.

How will this affect you and me?

This situation is not all doom and gloom, as the downgrade has already been priced into South Africa’s currency and bond market. The yield curve on South African government bonds has steepened and the currency has fallen sharply. Government bond yields have spiked over 12% from about 8% a month ago and as of Monday morning, the rand reached a record low and weakened past R18 a dollar. Therefore, the rand and bond market might not weaken substantially further as a result of the downgrade.

Interestingly, South Africa faces many of the structural challenges similar to that of Brazil prior to their sovereign credit downgrade. Moody’s, was also the last credit agency to downgrade that country in February 2016. However, their currency proved to be resilient, as most of the risk was already priced into their bond yields before the downgrade.

The negative outlook indicates that South Africa’s economic growth is at risk of contracting even further and the debt burden is likely to rise, which would impact government’s access to funding. The lower credit rating implies that government will have to endure higher borrowing costs, with foreign investors holding about 37% (R800bn) of the market.

The downgrade will trigger South Africa’s exclusion from the FTSE World Government Bond Index (WGBI) by the end of April. South African government bonds will fall out of the WGBI and this means that worldwide passive funds will have to dump rand bonds, once South Africa is excluded. It is impossible to accurately predict the monetary impact of this outcome, however it will more than likely be in excess of R100bn.

Since the JSE is mostly driven by SA multi-nationals (for example, Naspers) and not SA Inc (for example, banks), it may very well result in an improvement of the JSE levels due to the weaker rand. As a result, this would have a largely positive impact on your retirement funds and savings.

Lessons from the past

The downgrade will hurt household and business confidence at a time when the country is under enormous pressure. However, in uncertain times like these, we must look to historical data for direction, which tell us three things:

• It is tough to predict when to get out of and back in the market, so it’s best to hang tight and not withdraw your investments.

• Downgrades have affected economies, but they have recovered.

• We cannot predict the economic effects of the Covid-19 pandemic.

Evidence of long-term focus

A long-term view is key to successful investing because investments held for longer periods tend to exhibit lower volatility than those held for shorter periods. History dictates that we find that periods of extreme volatility occur at least once a decade. Therefore, we should not be surprised when it happens, although such a reaction is only human nature.

South Africa has seen its credit ratings fall since 2009. Our country has made its way up the credit rating path to A grade, even an A+ in the early 2000’s, and it can make it back again as long as government takes action and implements policies that are already in place.

What do we do now?

We urge our members to be adaptable to change and adopt a rational mind-set when making decisions about their investment portfolios.

Please speak to a reputable financial advisor to determine the course of action that makes financial sense to you.

Remember that a challenging situation always presents an opportunity.

Therefore, fill the gap by saving more, not less.

We strongly recommend against withdrawing your hard-earned savings during uncertain times like these. Hang tight!