Now is not the time to panic

This is no time for rear-view mirror investment decisions.

Magnus Heystek | 15 March 2016 00:01 

It’s one thing trying to slip a fast one past a morning radio host, but to try the same line with a battery of credit ratings agency analysts will be a different kettle of fish altogether.

Last week finance minister Pravin Gordhan tried to slip in the now over-used ‘We have a good story to tell’ – line past the evergreen John Robbie on the 702/Cape Talk morning drive. It was a feeble attempt at trying to raise the national mood, which has been plunged to near-depression levels ever since the Nenegate-shambles which hit the country on December 9 last year

I have no doubt that those four days will go down in SA’s history as some of the most pivotal and desperate – an attempt to salvage the country from crashing headlong and suddenly into multiple debt downgrades, a collapse of its currency, bond and equity markets and probably a re-introduction of exchange controls, just for starters.

The really bad stuff would have come later, as rising unemployment, hunger, increased capital flight (for those who could) and skills, would have laid the groundwork for a repeat of a Zimbabwe-style collapse.

One day the true story of those political/financial high drama days will come out. The fact that Zuma recanted and changed his decision shows the immense the pressure he was under.

Kudos must go to those private sector leaders such as Mike Brown (Nedbank), Colin Coleman (Goldman Sachs) and Patrice Motsepe (African Rainbow Minerals) who realised something had to be done to save SA from collapse. There were others involved, I’m sure. On behalf of all South Africans who would not like to experience a Zimbabwe-style collapse, I say: “We salute you”.

Truth be told, we don’t have a good story to tell at the moment and I think Gordhan knows it. I also think he’s resigned himself to the fact that we will be downgraded to junk status, if not in June then definitely in December. Lack of growth is our biggest weakness currently and it will take a drastic turnaround in government’s political strategies to boost our growth rates. I don’t see it happening soon.

Downgrade looming

All eyes will be on the Moody’s team when it arrives in South Africa for an inspection and meeting with key players before formulating its ratings view.

Moody’s currently has a rating for SA’s debt one notch higher than those of ratings agencies Fitch and Standard & Poor’s. The latter two have ratings for SA according to their own respective metrics at one level above so-called junk status. A widely-expected downgrade by Moody’s would not mean an automatic downgrade by the others, but it would make it highly likely.

It will take a meaningful turnaround in our economic trajectory and some very persuasive arguments to avoid a downgrade to junk status by at least one of the major ratings agencies later this year, probably in December.

Forewarned is forearmed

For some this unfolding scenario is no surprise. A handful of independent and non-aligned economists and analysts, myself included, have warned for some time that our economic trajectory is heading for the rocks.

Those who’ve been sounding their warnings with ever-rising stridency include Mike Schüssler, Dawie Roodt, Kevin Lings and George Glynos. They’ve either been ignored or made off as economically-irrelevant.

The economists of the large banks and insurance companies, by and large, are under strict instructions to tell a ‘good story’ as I’ve written before. Bad forecasts are bad for business and even worse for your business relationship with government. But the only people who suffer are those who base their investment decisions on the good news story.

So when the Sunday Times carries an op-ed with the title ‘SA has 3 months to save itself’ by Coleman, Wiese and Cassim Coovadia (Banking Association of SA MD), you know that things are truly serious.

To quote: “We have, in essence, a window until June to announce concrete measures for ratings agencies such as Standard & Poor’s to consider as part of their normally scheduled deliberations on South Africa….

“Let us be clear: failure to act is not an option. Losing our investment-grade rating would likely trigger a poisonous cocktail of a higher cost of capital, a weaker currency, slower growth and higher inflation. It would be bad for South Africans across the board.”

There you have it.

Just how bad can it be? 

Already we’re seeing a price surge in imported goods. Golf clubs, medical equipment, DSTV, you name it – if it’s imported it’s going to rocket in price.

And this is only the beginning: much of what is selling now is probably old stock ordered a year or so ago.

The cash-strapped consumer has abandoned hope of keeping up with spiraling prices. Two weeks ago Edcon (Edgars) announced that it’s discontinuing many lines of imported clothing. In a frank admission it said that the consumer has given up the ghost: it cannot afford them anymore. There’s no point in keeping up with the Van Der Merwes or the Khumalos: they are as broke as you are.

Speaking at the annual Car of the Year banquet last week, Wesbank CEO Chris de Kock gave a sober, realistic assessment of the outlook for the SA motorcar industry, which he says will decline by 12% this year.

De Kock presented four potential scenarios, each supported by a substantial percentage of economists. 

The bleakest of these scenarios sees prolonged global economic weakness while SA suffers persistent low economic growth and even slips into recession. It assumes that local policymakers continue to make mistakes.

Should this pan out, with the rand falling to R22.90 to the US dollar, you could expect new car prices to increase by an astonishing 84% by 2019.

Even in a best-case scenario, supported by only 13% of the economists, one can only expect a fractional strengthening of the currency.

The most likely scenario, says De Kock, is a downgrade to junk status with a gradual weakening of the rand to R17.20 to the USD by 2019, with car prices ‘only’ increasing by 39% over this time. An entry-level new car will by then cost you R200 000.

Hang on to your old jalopy.

Investment decisions to be made

There are times in a nation’s history when things happen over which you have no control. We are in one such time. However, what you can control is your reaction to such looming events.

Investors have a three-month period, perhaps a little longer if we’re lucky, to reconsider and rearrange, if possible, our personal investment strategies.

Many investors have been de-risking their investment portfolios by reducing exposure to local equities and listed property, in exchange for greater offshore exposure. This is apparent in Asisa’s latest figures, which show a clear swing from direct equities to multi-asset portfolios that can increase or decrease exposure to perceived risk assets.

The outflow of personal assets in the form of direct offshore investment has also risen sharply in recent months.

If I had a large living annuity which had to produce a sustainable income for life, I would drastically reduce my equity and listed property exposure and even consider ‘parking’ the money in a cash or high income portfolio which should give me a risk-free return close to 8% – about where a conservative drawdown should be pegged.

The true winners are the investors who diversified three to five years ago when the rand was strong and offshore markets were very appealing. But few took advantage of that opportunity. Retail investors are notoriously bad at market timing and more often than not look for confirmation of their investment decisions by looking into the rear-view mirror.

This is no time for rear-view mirror investment decisions. This is a time for looking far ahead, keeping eyes on the road and both hands on the steering wheel, left foot hovering over the brakes. Prepare to use them quickly. 

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