Where to put your money in these uncertain times

Around the world, the value of stock markets has fallen by at least a quarter, offering better value than they have in years.

South African bonds are offering interest rates more than double the rate of inflation. Is now the time to invest, and where are the opportunities?

One 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 create significant contribution to future returns.

However, in times of uncertainty, liquidity is important and now may not be the time to invest new lump sums into a market-related investment unless you have stress-tested your finances.

What to consider

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’ expenses? Do you have significant short-term debt that you need to reduce? These are some of the things you should consider before you decide to start investing.

We think it would be incautious to load up with risk assets when the economic trajectory is still so speculative. 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
Brian Arcese of Foord Asset Management

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. 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,” says Brian Arcese of Foord Asset Management.

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, chief 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 that have a balance sheet that can withstand shocks and those with offshore assets,” says Lings, who cautions against buying into the wider market as there are still significant risks.

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.

Quick market recovery

Izak Odendaal, investment strategist at Old Mutual Wealth, believes 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 (R36 trillion) being announced, with the aim of really putting cash back into the pockets of consumers and helping businesses that are struggling with loans, grants and finance to try to 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 quick,” says Odendaal.

Ackerman says we still face an extremely challenging time ahead: “Even if there is more pain to come in the near-term, there will definitely be more upside over the longer-term. The economy has been severely impacted by the Covid-19 coronavirus 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.”

Should a deep recession set in, the best strategy for the average investor is to have a cash buffer to continue with regular investments and to look for new investments in select pockets of opportunity, including diversification into other asset classes such as bonds and offshore.

How to invest in bonds

With government bonds providing interest rates of about 11%, there is an opportunity for local investors in terms of both income and possible capital gains. Bonds have both a capital and an 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.

Owing to the sell-off in the bond market, the capital value has decreased, but this has 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 in the RSA Retail Savings Bond. This acts like a fixed deposit.

Unlike a fixed deposit with a bank, the RSA Retail Savings 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 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 – all for a minimum investment of R1 000. The inflation-linked bonds are paying 3.75% above inflation.

Owing to the lockdown, you can only purchase RSA Retail Savings Bonds online through the website rsaretailbonds.gov.za


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