3 minute read
COVID-19: Bump in the road or the end of the road?
MICHAEL ADSETTS Deputy Chief Investment Officer, Momentum Investments
The widespread personal and economic devastation in the wake of COVID-19 is in the order of magnitude of some of the biggest disasters of the last century. In our hyper-connected and interdependent world, the speed with which the pandemic has affected all of us is unprecedented. The market recovery has also been unusually rapid, especially with the full economic effect not yet seen nor quantified.
It is tempting to think that this crisis is different and that economic systems and markets will change irrevocably. The nature of markets is inherently adaptable and we are well aware that there will be winners and losers as companies navigate their way through the current environment. There are also far more unknowns that we just do not have the answers to yet. At best, we can make an educated guess and maintain a sufficient level of flexibility in thought and action to open-mindedly assess how economies and markets will react.
There are a few areas and sectors that are coming into stark focus with big questions about how they will adapt. In the property sector, the role of offices and retail outlets are being re-imagined, especially in the context of the adoption of work-from-home patterns, as well as the potential for the rise of online shopping. This needs to be considered within the context of the economic structure of South Africa. While it may be appealing to think that remote work will become the de facto mode, the reality is that most of the South African population cannot realistically work from home (you cannot mine or build or farm remotely). A similar dynamic would affect retail properties.
Those companies that adapt to the effects of COVID-19 or enable others to adapt should turn out to be the winners. At the moment it looks like the tech companies have been the beneficiaries, with the likes of Apple and Zoom showing spectacular results and returns.
Much of the disconnect between markets and economies is being driven by the significant amounts of funding provided by governments around the world, as part of COVID-19 relief initiatives. The net effect of this funding is that the balance sheets of governments are getting bigger, and their sovereign risk is increasing. In South Africa, there has been an extensive bond-buying programme by the South African Reserve Bank and a significant reduction in interest rates. National Treasury has also been issuing significant amounts of bonds, and has approached the International Monetary Fund for a loan; while at the same time, tax collection by the South African Revenue Service has been reduced significantly as a result of the recession. So, while the yields on SA government bonds are attractive, this does need to be evaluated against the increasing risk of these assets.
With all this uncertainty, it feels dauntingly difficult to decide how to invest your clients’ money. The best answer, when you are unsure of where to invest, is to diversify your assets and be very mindful that you do not inadvertently build up concentrated risks. Thoughtful and systematic risk management is therefore one of the key fundamentals. This is what we do consistently when we manage assets at Momentum Investments.
COVID-19 will not be around forever and, as through countless crises before, the world finds a way to adapt and move forward. There is no reason to believe this time will be different. What we are currently experiencing will pass, and the best approach for financial security in the future is to remain invested.
