THE CONFLUENCE OF A GLOBAL SHUTDOWN AND FALLING FINANCIAL MARKETS DUE TO THE CORONAVIRUS PANDEMIC WITH COUNTRY-SPECIFIC ISSUES SUCH AS SOUTH AFRICA’S GDP CONTRACTION AND CREDIT RATING DOWNGRADE MAKE IT DIFFICULT FOR INVESTORS TO KEEP A COOL HEAD.
MARTHINUS VAN DER NEST, HEAD OF AMPLIFY EXPLAINS.
With each passing day there are more infections, stricter lockdowns, industries shut down or facing closure and increasingly panicked predictions of the impact, to which markets react with sharp volatile movements.
What we do know is that financial markets have felt huge shocks before and have always recovered. What is less clear at this stage is how long this particular decline and recovery will take.
The JSE All Share index lost more than 30% between New Year and March 16 but has since clawed back 10%. Volatility remains the order of the day, so there will likely be many more ups and downs until the virus is contained and the world economy gets back on its feet. Recovery to pre-shock levels could take anything from a month to well over two years judging by major sell-offs since 1987, the longest being the 2008 global financial crisis, where a 128-day sell-off was followed by a 787-day extended recovery.
Source: iNet – Figure as of market close 31 January 1960 to 20 March 2020
Disclaimer: The sell-off measures from the market high to the market low based on the closing price of the JSE ALSI (AJ203 – CL) in relation to a specific event. The JSE ALSI index is an index of the JSE stocks used as a macro-level indicator of the overall South African equity market. This material represents an assessment of the market as of a specific date. Is subject to change and is not intended to be a forecast of future events or a guarantee of future results. Monthly data used from 01 January 1960 until 31 July 1987; weekly data used for 01 August 1987 until 30 June 1995; and daily data from 30 June 1995 until current date. Past performance is not indicative of future results. The material contains general information only and does not take into account an individual financial circumstances.
In the interim, good active managers are finding opportunity in depressed securities prices and grabbing the chance to buy oversold companies at a discount. Once the noise subsides, investors will benefit in the recovery.
Markets continue to function well as they attempt to discount the impact of the virus on companies and the economy. Humans, however, are prone to overreact. We will be inundated with statistics and predictions about how bad things can get. At this stage nobody knows how many people will contract the virus, how many will die, and what the economic impact will be.
The adoption of new technologies and rate of disruption, due to the effect of the virus, is set to increase once we return to a new normality. This will create opportunities for individuals and companies, and those that don’t adapt will have their business models uprooted.
Skilful investment managers are already working on identifying these trends, as well as other oversold assets, and will be well positioned to identify the potential winners and losers.
“Small, agile asset managers will undoubtedly be more able to position and adapt their portfolios accordingly than large managers.”
Amplify continues to trust in its research process that has helped it identify the right managers as it becomes increasingly important to be invested in fund managers that are able to make quick decisions to unlock value in a changing world.
Amplify has been in constant communication with its fund managers who continue to use their agility in repositioning portfolios for the best possible outcome for investors. Their high-level views reflect their funds’ initial responses and allow Amplify to make investor-specific recommendations
- Omri Thomas at Abax Investments, which manages the Amplify SCI Flexible Equity Fund, said that risk assets have sold off materially and valuations and market participants have been indiscriminate in their selling. He estimates that a year of lost earnings would probably reduce the value of most businesses by about 10-15% – much less than the market has already fallen. Additionally, spending typically resumes with gusto after a period of hardship, which means not all earnings will be permanently lost.
- Iain Power, Chief Investment Officer of Truffle Asset Management, which manages the Amplify SCI Wealth Protector, said global asset prices had been trading at high multiples and are now in a better position to purchase. The fund will focus on preserving capital and staying clear of companies with a great deal of leverage.
- Brian Thomas, Portfolio Manager at Laurium Capital, which manages the Amplify SCI Balanced fund, said the fund was underweight equities and overweight offshore exposure and bonds, and is reducing its exposure to Tier 1 corporate bonds, –
- Erik Nel, Chief Investment Officer of Terebinth Capital, which manages the Amplify SCI Strategic Income fund, said the majority of the fund is in bank and corporate credit and it also has interest rate swaps and offshore hedges in order to hedge large bond positions. The fund has reduced its exposure to listed property.
- Imtiaz Suliman, Portfolio Manager at Sentio Capital, which manages the Amplify SCI Equity fund, said the fund still sees value in resources such as platinum, and currently prefers growth to value stocks.
- Eben Karsten, CEO of Matrix Fund Managers, which manages the Amplify SCI Defensive Balanced and Amplify SCI Absolute funds, said Matrix is not ready to call the bottom of the equity market just yet, and that there has been a massive sell-off in bonds, but there are many buying opportunities coming from all asset classes.
Amplify and its fund managers are working hard to protect investors’ funds and make sure we are positioned for growth as soon as the markets normalise.
We are doing this by keeping cool head, as we know the recovery will come.