“Panic is highly contagious, especially in situations when nothing is known and everything is in flux.” (Stephen King)
South African investors have every right to feel concerned. The local economy is facing a heap of problems, and growth has slowed to almost nothing.
The recent weakness in the rand has only made things worse. The local currency was trading at under R16 to the dollar a year ago, but almost reached R20 to the dollar in May.
The JSE All Share Index enjoyed a good rally at the end of last year and into January, but it has struggled over the past few months. So there has been little to lift the country’s mood.
The question for investors is whether things only continue to get worse from here. Is South Africa becoming uninvestible?
First, some context
Without in any way diminishing the country’s problems, it is critical to retain perspective.
As senior members of Allan Gray’s investment team pointed out at a recent event, South Africa is very far from being Zimbabwe. The country is even quite a long way from being Turkey, where inflation is close to 40% and the lira has collapsed from under R5 to the dollar in 2018 to over R23 to the dollar today.
Our issues are serious, but we still have functioning markets, inflation is under control, and the recent pullback in the rand showed that we are not just on a one-way road to ignominy. The currency can, and often does, move in either direction very quickly.
It is also useful to bear in mind that even if inflation in South Africa were to spike, investors in the local stock market would almost certainly be protected. That is because the companies listed on the JSE will earn more as inflation goes up. Owning shares in companies that are able to adjust their prices to take inflation into account has always been a good way to protect the value of your money.
Even in Zimbabwe, where inflation has gone into overdrive more than once, the stock market has protected the value of investors’ capital.
What’s more, a worst-case scenario in South Africa would see the rand blow out. In that case, the JSE would again be a perfect hedge.
Estimates are that around 70% of the revenues that listed companies in South Africa earn come from international markets. So those profits that they are earning in dollars, euros, pounds and yuan would be even more valuable in rand terms if this happened.
Learning from history
It’s also worth considering what happened the last time local investors got a big shock. In 2001, the rand was the world’s worst performing currency. It went from R6 to the dollar to R13 to the dollar in around 12 months.
Many South Africans panicked at that point and took a lot of money overseas. It felt like there was no stopping the fall. However, within a year the rand was back to R7 to the dollar, and even pulled back to under R6 to the dollar by the middle of 2005.
More than that, this was a time when South African markets were cheap, and overseas stocks were expensive. So overseas investments that were made then lost people a lot of money.
Once again, we are in a situation where the rand is cheap, and the dollar is expensive. Also, South African shares and bonds are cheap, and many international markets are expensive.
Taking money offshore now would therefore be a classic case of selling low and buying high – exactly the opposite of a good, long-term investment strategy. Over the last few months, many South African asset managers have actually been bringing money back into South Africa, precisely because they see the opportunity to make the much better long-term decision of selling high and buying low.
The best investment strategy at a time like this is therefore not to make any rushed decisions. Markets always move in cycles, and the crisis you are in always feels like the worst.
But if you have a well-diversified portfolio, you should feel confident that it can withstand a lot. Just in the last few years, it has already had to overcome the Jacob Zuma presidency, Covid and Russia’s invasion of Ukraine.
And if you have stayed invested, you will be better off. The average balanced fund in South Africa has gained 7.2% per annum over the past 10 years, and 7.7% over the past five, according to Morningstar figures. Those are not extravagant returns, but they have beaten inflation, meaning that those who have stayed invested, are wealthier than when they started.
South Africa has, and will probably for some time continue to have, serious problems. But they are not reason enough to panic with your money. Because making big decisions in the middle of a crisis is not likely to lead to good long-term outcomes.
To discuss your financial plan, speak to a professional.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.