Time for caution

The fall-off in equity valuations is just the latest issue to affect investors over the last few years.

The looming ‘fiscal cliff’ and a likely credit rating downgrade to ‘junk status,’ hangs over them. The economic outlook is not great either as the government predicts GDP to grow at under 1% for this year.

It says a lot about where we are now when Finance Minister Tito Mboweni is applauded for a projected budget deficit of 6.8% of GDP.

Fears over the impact of the COVID-19 is not helping, as it has been blamed for the 4.5% fall to 51,038 of the JSE’s Alsi on On Friday. The index has fallen almost 9% over the past three months.

The year has not started well for anyone invested in South African equities.

Although the influence of the virus on global and local markets must still fully play itself out, it could easily end up bookmarking an end of a lengthy period of sold above inflation valuation funds for local asset funds.

According to the Association for Savings and Investment SA (ASISA), representative body for asset managers and investment funds, equity, bonds and money market portfolios have outperformed inflation have all outperformed inflation in on an annual, five-year, 10-year and 20-year bases.

This performance does not tell the whole story. For one, local investors have been very cautious when it comes to picking investment portfolios.

Sunette Mulder, senior policy advisor at ASISA says in a statement last week that around 12% of all international Collective Investment Schemes (CIS) assets are invested in equity portfolio risk-averse multi-asset portfolios. By comparison, 49% of the CIS under management R2.5 trillion in SA was held in multi-asset portfolios.

The rest were held in SA Interest Bearing portfolios (30%), SA Equity portfolios (18%) and SA Real Estate portfolios (3%).

Mulder notes that there is little appetite for equities last year. This saw the SA Equity General sector to suffer net outflows of R13.5 billion in 2019.

Although the markets have not performed well since the beginning of the year, now is not the time to panic. Tal Nieburg, the managing director of Morningstar SA, says its best to stay invested and to ride out the current uncertainty.

Nieburg has a point. When looking at the ASISA table, the 20-year period to end-December 2019 includes several huge market selloffs like the 2000 dot com crash, as well as the 2008 global financial crisis.

After each of these major selloffs, local and international markets recovered to record highs.

This does not mean there are no reasons for local investors to not be wary about investing in SA. Nieburg says local asset managers still have deep concerns about mooted policies like the government forcing funds to invest in prescribed assets.

Such a move could see funds being forced to invest in state-aligned assets, which would limit their capacity to invest in the private sector.

Though prescribed assets are a concern, from his interactions with several fund managers, there is the mood of cautious optimism following Mboweni’s budget speech last week, where he said he was prepared to slash R160bn of the public wage bill.

This move, along with efforts to sort out South African Airways and Eskom, as well providing an extra R2.6bn in funding for the NPA, which would increase the number of investigators by 800 and prosecutors by 200, is cause for optimism.

Nieburg, however, points out at that mood is still one of being more cautious than optimistic.