When a tide becomes a trickle: Of droughts and markets

(iStock)
(iStock)

As the saying goes, "Never waste a crisis". The water constraints that made the threat of "day zero" loom over Cape Town for nearly a year, and the beating that the all share index took in 2018, have more in common than one might think.

PSG Wealth financial adviser Richus Nel says both the severe drought in Cape Town and the Western Cape, and the ill fortunes of the Johannesburg Stock Exchange, caught South Africa napping - and hold lessons for better planning in future. 

'Extreme market weather'

In a thought piece, which PSG sent to Fin24, Nel said South Africa’s status as an emerging market meant the country was prone to "extreme market weather". 

"The last few years have not been kind to investors. 

"Poor economic performance from poor political leadership has severely compromised our country’s credibility and stability as a foreign investment destination. We have therefore not benefited from the emerging market rainfall (2015-2016) our neighbouring economies experienced," said Nel.

Catch water when it rains

South Africa can control its efforts to drive the economy, preserve money and capture as much return as possible "when it eventually starts to rain", he added.

"While many market commentators may pretend they know where and when it will rain next, market returns come in unpredictable cycles.

"Understanding that financial returns are often intermittent, will help you prepare a more holistic long-term plan for all seasons," Nel said.

He said changing plans during a "drought" did not seem rational, as properties, businesses, farms and stocks do not sell well during a drought.

"Therefore, it makes more sense to determine your long-term investment strategy during the rainy season and stick to it through the drought at least until the rain has arrived again," he said.

Build your dams in good catchment areas

He encouraged investors to diversify internationally, as there are many countries around the world that receive good rainfall - while no investor will receive constant, continuous returns. 

"Every country and every economy has both rainy and dry seasons. Advisers can help investors to plan ahead for all economic seasons, to flourish financially," he explained.

Other lessons the drought brought to investors, Nel said, were to prioritise saving, strive for independence from the "system", avoid waste and diversify the pipelines that your precious resource flows from.

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