While investors watch their investment values collapse, some see this as an opportunity.
Around the world the value of stock markets has fallen by at least 25%, which means markets are now offering better value than they have in years. Locally South African bonds are offering interest rates more than double the rate of inflation. So is now the time to invest, and where are the opportunities?
You should continue with regular monthly investments into retirement funding and other discretionary investments, as those contributions are picking up shares at lower prices which could make a significant difference to your future returns.
However, in times of uncertainty, liquidity is very important and now may not be the time to invest new lump sums into a market-related investment, unless you have stress-tested your own finances.
Listen to Maya and Mapalo Makhu discussing this topic with Craig Pheiffer, chief investment strategist at Absa Stockbroking, in the My Money, My Lifestyle podcast.
How resilient are your finances if the economic crisis continues for some time? Do you have an emergency fund that will cover at least three months of expenses? Do you have significant short-term debt that you need to reduce? These should be considered before you decide to start investing.
Still many unknowns
The overall message from South African fund managers is one of caution as there are still many unknowns.
“We think it would be incautious to load up with risk assets when the economic trajectory is still so speculative,” says Brian Arcese from Foord Asset Management.
“In our flagship multi-asset fund, the hedges still guard against further market weakness. But many quality long-term investment opportunities are now suddenly attractively priced. We will not squander the opportunity. But we will deploy cash warily and wisely.”
Maarten Ackerman, Chief Economist and Advisory Partner at Citadel says the current value in government bonds is making them attractive options.
“For investors with a longer-term horizon, this presents an opportunity to lock in those higher yields. In the longer term, the bond market should perform well, given the higher interest rates that we are now able to access, while inflation is still quite muted. Having investments spread across geographies, across asset classes and across investment styles will pay off when volatility hits markets and uncertainty is rife. Now is the time for investments to be positioned defensively and prudently.”
Kevin Lings, economist at Stanlib says fund managers are buying into government bonds as these are showing significant value. However, they are more cautious on buying shares.
“At these prices we are selectively buying into companies who have a balance sheet to withstand shocks and those with offshore assets,” says Lings who is not advocating buying into the wider market as there are still significant risks.
Important to remain invested
While fund managers remain cautious about large-scale investing at this stage, it is also not the time to cash in. There seems to be a sense of optimism about a potential recovery as markets tend to price in a recovery before the actual economic figures support it. In fact, we have already started to see some market recovery as predictions are that businesses will start to open.
Izak Odendaal, investment strategist at Old Mutual Wealth believes that a recovery in the markets could be on the cards as central banks across the world have been buying bonds from financial institutions allowing more cash into the system.
“We’ve seen stimulus packages amounting to more than $2 trillion being announced with the aim of really putting cash back into the pockets of consumers, helping businesses that are struggling with loans, with grants, with finance to try and cushion the blow of this tremendous shock to the global economy. And that’s important for us because the sooner the global economy recovers, the sooner South Africa will recover.
“It is also worth remembering that markets tend to recover even before the economy does. So as investors, it is important to remain invested because we cannot time those turning points. They are unpredictable, and when they do happen, they tend to be quite sharp and quite quick,” says Odendaal.
“Even if there is more pain to come in the near term, there will definitely be more upside over the longer term,” says Ackerman who adds that we still face an extremely challenging time ahead.
“The economy has been severely impacted by the pandemic and national lockdown, but there is more than enough monetary support globally – in fact, the highest in global history. Even our own central bank cut rates and introduced quantitative easing. So as soon as infections move past their peak and we can open for business again, we should see quite a large and rapid rebound with all the proactive support that is already in place.”
The best strategy for the average investor is to firstly have a cash buffer should a deep recession set in, to continue with regular investments and for new investments, look for those select pockets of opportunity which should include diversification into other asset classes including bonds and offshore.
How to invest in bonds
With South African government bonds providing interest rates of around 11%, there is an opportunity for investors both in terms of income and possible capital gains. Bonds have both a capital and interest (yield) element. If you purchase a bond and hold it to maturity, then you receive the annual interest (coupon) and your capital back at the end of the period.
However, during that period the value of the bond can fluctuate depending on the interest rate. The capital value of the bond is inversely related to the yield which means that when the yield rises, the capital value decreases. Due to the sell-off in the bond market, the capital value has decreased but this had driven up the yield relative to the price of the bond.
Retail investors can access bonds either through investing in an income fund via an asset manager or through buying an exchange-traded fund that tracks the government bond index GOVI.
Another way for investors to benefit from the high bond yields is to invest into the RSA Retail Savings Bond. This is a retail bond and acts like a fixed deposit. Unlike a fixed deposit with a bank, the RSA Retail Bond’s interest rates are priced off bond yields. When interest rates were cut last month, the banks reduced the interest paid to depositors. However, with the increase in the bond yields, the RSA Retail Bond increased interest rates.
Currently you can earn 7.75% for a two-year fixed deposit, 9% for a three-year fixed deposit and 11.5% for a five-year fixed deposit. The minimum investment is only R1 000. The inflation-linked RSA Retail Bonds are paying 3.75% above inflation.
Due to the lockdown you can only purchase the RSA Retail Savings Bonds online through their website.
How a bond works
If the bond is issued at R100 with a coupon value of R9 per annum, then the yield is 9%. If the value of the bond falls to R80, an investor who buys the bond at R80 will still receive the coupon of R9 which equates to a yield of 11%. If the bond strengthens to R90, the investor could sell and make a capital profit of R10 per bond.
This article first appeared in City Press.