The past few months have been filled with uncertainty since news of the novel Coronavirus, now known as Covid-19, resonated across the world. Investment markets started this year with equities often at record highs, driven by sound global economic growth and a market-friendly US political agenda. However, since then there has been a global economic decline caused by the Covid-19 and Oil shocks, among others. Some investors are understandably concerned about achieving their investment goals. We acknowledge that this is uncharted territory and in this communication, we aim to provide you with our outlook on investment markets and remind you of the best ways to deal with market shocks.

Moody’s downgrade
Moody’s downgraded South Africa (SA) to junk status on 27 March at midnight. They cut both the local and foreign currency-denominated debt to sub-investment grade, from Baa3 to Ba1, and retained their negative outlook of the South African economy. The timing of this is unfortunate as South Africa, like many other countries, is grappling with containing the outbreak of COVID-19. Many governments, including SA, have deliberately shut down large parts of their national economies in peacetime as part of their lockdown measures to mitigate the spread of the virus.
The Moody’s decision was largely expected since the February 2020 National Budget. While the Budget contained some positive measures such as the surprise willingness to cut the size of the public-sector wage bill, there were unfortunately also many negatives.

What does this mean for SA investments?

The downgrade means that South Africa’s debt will be removed from the FTSE World Government Bond Index at the end of May 2020. Before the onset of the current market turmoil driven by the COVID-19 pandemic, this downgrade was already pretty much priced into financial markets. It had been expected since Standard & Poor’s(S&P) and Fitch cut South Africa’s debt rating to sub-investment grade in 2017.

These two events will truly test South African financial markets. South Africa’s deep, stable financial sector and robust macroeconomic policy framework have always been flagged as a credit strength. This includes the South African Reserve Bank’s demonstration of a good track record in implementing credible and effective monetary policy and preserving financial stability.
To compound this, the Organisation of Petroleum Exporting Countries (OPEC) and Russia had a fall-out. On Sunday 8 March, Russia refused to sign an agreed quota reduction agreement alongside OPEC. OPEC, led by Saudi Arabia, not only pulled the proposed cuts, but pledged to increase their own production by one million barrels per day and to sell their crude at discounted rates. The oil price promptly halved, sending broader equity markets into an initial tailspin.

The rand weakened on Monday morning following the Moody’s announcement by about 1%. However, it has declined by around 25% since the start of the year due to the global crisis and has been in line with our emerging market peer group. Normally, a weaker rand would put upward pressure on inflation as imported items become more expensive. However, given that global oil prices have fallen much more than the rand, inflation is expected to decline during the course of the year. This will give the South African Reserve Bank scope to cut rates again, giving some more relief to consumers.

What should investors do in these times?
While we can’t control global or local market events, we can control when we invest, how we diversify our investments and how long we remain invested for. Not investing, or leaving the market now for any reason, equals missing out on potential growth and risking the opportunity to realise your goals. Now, more than ever is the time to stay invested.

The urge to act in a crisis is enormous, but investors should stay focused on their long-term investment goals and not react in a knee-jerk manner by pulling assets out of the market at lows – it simply locks in losses and it is almost impossible to time when to re-enter. This is a recipe for selling low and buying high, and even seasoned investors should be wary.

At Old Mutual Unit Trusts, we support the SA governments’ call to stay at home and limit the increase of COVID-19 infections. Our Crisis Committee has been planning for a potential lockdown for some time now, and there is no interruption in servicing our clients. We remain committed to managing your investments with the view of creating wealth and securing your future investments during these volatile times. As clients, you remain at the epicenter of our decisions.

We understand that these are trying times and would like to wish you and your loved ones health and safety during this time. Please feel free to contact us or your Financial Adviser should you have any concerns or need information regarding your investments. You can call our Client Contact Centre on 0860 234 234 or email unittrusts@oldmutual.com.