A view on COVID-19, market reactions and mortality reality?

Can you find the eye of the storm in the global hurricane named Covid-19?

The existential shock of this flu and the havoc it is wrecking upon our world, is a new experience for a lot of us.

My aim is to provide a perspective on finances during this crisis and I have included information regarding your financial planning, wealth management and risk concerns. This note will cover the impact and opportunities of the crisis and not the intricacies of the flu.

COVID-19 & Its Impact

I believe COVID-19’s impact will be felt for a long-time, as an event that is beyond a financial, social responsibility and personal health fear. We must all heed a call for a measured response that removes panic and stock-piling behaviour. Take this time with your families to discuss how this new reality will affect us all. These are unprecedented times and how we see this through will determine a lot of our world and country’s future.

Like all illnesses and flu’s before it, there is a likely chance that we will all get it or a version thereof at some time. Those with low or no immunity are usually impacted the worst, whereas the majority will recover. I personally agree with self-imposed ‘house arrest’ as is being adhered to by most South Africans, it proves that we are, as a wider grouping, able to heed calls to protect our fellow humans. Accepting that you may get it could also minimise some fear. So take measures to minimise its spread, seek treatment and protect your family effectively.

Like all illneses and flu’s before it, we will all get this or a version thereof at some time. Like all other flu’s it will impact those with low or no immunity the worst whereas the majority of us will recover. I do agree with this method of self-imposed house arrest as it then proves that we are, as a wider grouping, able to heed calls to protect our fellow humans.

Our intention, as a firm, is to use this time effectively to engage with our clients. We can assess risks, create plans and ensure that this moment in History is one that makes us stronger.

Financial Impact & Opportunities of Covid-19

How will it impact businesses and our financial markets?

When it comes to business I shall reference this McKinsey Article – (mck.co/3aKg3L). This article and its resources are comprehensive and fact-based for businesses and your personal sanity amidst the noise [click on ‘full briefing materials’ for a PDF resource and advice to “COVID-19-proof” your business]. It provides a strategy for your business to see through this malaise.

When it comes to global markets, look at any of the markets and you will see how much they have already been impacted. All markets, including our local ZAR market are down around 30%. Check in again tomorrow and it may have fallen further. Where or when the bottom is hit is anyone’s guess currently.

This market conditions do present buying opportunities. Below I outline possible opportunities that could potentially payoff in the long run.

  1. EquitiesFor example, SASOL. At a recent Nedgroup Conference, an asset manager mentioned Sasol’s one major offshore asset, Lake Charles’, intrinsic value was somewhere around R100 per share. Their current share price is around R30–40 a share. If you bought now you would get the entire asset at a 60–70% discount, without taking into account any of their other operations. Just be aware of where that oil crisis is heading – if the Saudi’s continue their fight this may present a bigger issue for more the just Sasol (Most other oil companies are down 75 %).
  2. Local SA Property (if you have capacity and risk appetite)
  3. Exchange ratesThe ZAR range is volatile – look at any 1 year plus chart of ZAR vs USD, it equates to a roller-coaster ride. The Rand has moved out of the ZAR14–15 band for the first time since August 2018, (Average ZAR14.50 for illustrative purposes) and at the current rate of R17.50, that’s a 20% weakening. One must then wait for the market recovery to recover on a capital basis. Whether the ZAR will recover is anyone’s guess however our fundamentals did not look positive before COVID-19.I have seen some commentators suggest repatriating currency at these rates. Guessing our currency is a fools game – when implementing a strategy: consider your overall, global geographic exposure and reduce risk accordingly.
  4. Global marketsRemoving exchange rate concerns, globally markets have tumbled along with SA equities. They are all offering massive value, especially as a recovery will likely come through in global markets before ours. Once again as per the iTransact article referenced – “During these events markets have historically shown to take up to 170 days on average to reach their low, and another 270 days to recover to their previous peak. Patience is the key to this time ahead.”

One must understand that markets are not rational, and they can remain that way much longer than one could remain patient or solvent (especially if you have open or hedged positions that you are paying for).

Make use of this opportunity to pick up assets at discounted values. When you invest and then compound this discounted capital asset (ignoring exchange rates), you create wealth. Once again referencing the iTransact article – “For instance, in more than half of all calendar years since 1980, the S&P 500 had suffered a correction of more than 10% in contrast to delivering a cumulative recovery of over 75%. The S&P 500 has therefore never yet failed to recover from a previous low. The JSE, which is strongly coupled to US markets during downturns and corrections, fares no differently,…”

With regards South Africa & our currency:

Taking a longer-term view on SA’s Debt to GDP ratio, combined with COVID-19 fallout, things will continue to get worse before they get better. A prevailing view is that a recovery will only start from the 3rd quarter of 2020. As such we may only see a recovery in the SA currency and markets from around 2021 and thereafter. Our growth prospects were low to start off with and this will just make things more dire.

My view is that I don’t expect a downgrade based on this fallout. Our budget was very business friendly and plans were afoot to not let things get much worse. Government had plans to try boost SA’s economy, time will tell how these will change in light of COVID-19. This is a global phenomenon and it would be very unfair (not that fair has anything to do with it) for Moody’s to downgrade countries based on something that is out of their control. Our Reserve Bank has also taken a bold move by providing a much needed relief with its 100 basis points (1%) drop in the Repo Rate and as such the prime lending rate by 100 (From 9.75 to 8.75%).

I have referenced two articles here that provide a real solid discussion on markets, emotion and how things turn around – as they have in the past.

  1. Excerpt from a Itransact article
  2. Then also this wonderful article I found on MoneyWeb that discusses how to position ones portfolio for something happening – like a Mermaid invasion

I am always positive and am not drawn into those dark holes where negativity reigns. Perspective is powerful, especially when it comes to making financial decisions. Be properly informed, remove emotion from the process and you will make rational decisions.

This is not meant to be advice or propose a strategy, merely to highlight opportunities and risks. You must always make your own decisions when it comes to your finances. Seek appropriate counsel and consider your own needs and risk appetite.

Anxiety and overwhelm are ever-present in this kind of event, and the only way through that is separating what you are in control of and what you are not. Look after yourselves.

Thanks and hang in there,

Duncan and the team at Perspective Advisory