How your financial adviser should manage SA’s economic challenges

IMF, Treasury, economy, GDP, unemployment, International Monetary FundBy Vimal Chagan, Divisional Director of Investment Propositions, Liberty IA Investments.

South Africa has experienced some serious economic and financial challenges in 2017. If you are worried about your investments in 2018, now is the time to carefully consider your next move. Financial Advisers have a pivotal role to play in helping you navigate these economic challenges.

It is important that your financial adviser understands the events that led up to the current state of the economy. The new minister of finance, Malusi Gigaba revealed the following concerns in his Medium Term Budget Policy Statement:

  • Projected tax revenue shortfall of R50.8 billion in 2017/18, R69.3 billion in 2018/19 and R89.4 billion in 2019/20
  • Lack of expenditure cuts (rising public sector wage bill)
  • Economic growth forecast revised downwards
  • Debt-to-GDP ratio forecasted above 60%

These serious economic challenges were exacerbated on 24 November 2017 after Standard & Poor (S&P) announced that South Africa no longer meets the criteria to be included in the Barclays Global Aggregate Index. However, South Africa still meets the requirements to be included in the Citi World Global Bond Index (WGBI).

The unfortunate reality is that any exclusion from an index makes it difficult for the country to attract investments in the Bond market. This is especially true for those investors or fund managers who only invest in bonds included in certain indices.

If South Africa was excluded from the WGBI, this would have had the biggest impact as it would force funds that track that index (global passive funds) to sell off South African bonds.

For South Africa to be excluded from the WGBI, local currency bonds would need to be downgraded below investment grade by both ratings agencies S&P and Moody’s.

2017 was marred with economic uncertainty

The events of the past few months caused the market to anticipate a downgrade announcement. Furthermore, there is still uncertainty surrounding the outcome of the upcoming ANC leadership elective conference in December this year.

  • Will the new presidential candidate be business friendly?
  • Will the candidate provide more certainty around economic policy going forward?
  • Or will things remain the same?

As a result of these questions, a downgrade was largely priced in. This means that there may be a bit of pressure on bonds yields in the foreseeable future but market consensus is that bond yields are not expected to blow out to the extent that they did when “Nenegate” happened in December 2015.

South Africa’s economic growth is under immense pressure

Both business and consumer confidence continues to be negatively impacted. A downgrade means that the cost of government borrowing will be higher. Higher cost of borrowing is reflected in higher interest rates, which may attract foreign investors searching for higher yields from emerging markets like ours.

This will have negative effects on your pocket as higher inflation is expected to be a reality in the future. Due to South Africa being an inflation targeting economy, higher inflation means higher interest rates.

Higher interest rates will most likely not be an immediate reality. The Monetary Policy Committee is unlikely to raise interest rates immediately following their recent announcement to keep interest rates unchanged. However, it is important to note that higher interest rates would negatively impact both your spending. All in all, this means that economic conditions will continue be tight in the foreseeable future.

What should your adviser be telling you under these uncertain conditions?

 Stay calm, keep investing and stick to your long-term financial plan in times of uncertainty. Research has shown that investors who stay invested for the long term do better than those who time the market frequently in the hopes of getting the best return.

 It is next to impossible to successfully time the market consistently and most professional investors avoid it. Liberty has investment solutions to help you through these tough times. This includes an offshore endowment plan, the newly launched risk profile portfolios and the High Water Mark guarantee that is offer on the Agile and Bold products. This allows you take on a little more risk while securing 80% of your existing investments.

In a nutshell, the best way to handle this volatility and uncertainty is to continue to invest. Don’t panic, remain focused and always speak to your financial adviser before making any drastic changes to your investment portfolios.

 

 

 

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