Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
FOR ASSET ALLOCATION
Alwyn van der Merwe
Director of Investments
Mar 25, 2020
The number of both infections and deaths has escalated materially since early March. In an in-depth study by Imperial College, it was observed: ‘The global impact of COVID-19 has been profound, and the public health threat it represents is the most serious seen in a respiratory virus since the 1918 H1N1 influenza pandemic.’ The authors argue that over the short term, the situation can be managed by mitigation measures that will protect those most at risk of severe disease from infection. They suggest that suppressing the transmission of the virus will require at least the physical distancing of the entire population in order to reverse epidemic growth ‘until a vaccine becomes available (potentially 18 months or more)’.
Given this view, we’re likely to see serious economic fallout as a result of measures introduced to suppress the virus, both globally and in our own country. Globally and locally, many small businesses will not survive. This will obviously have a knock-on effect on economic growth, unemployment and the short-term profitability of the wider business community.
Governments have already responded aggressively by implementing measures to mitigate the effect of the virus and by providing economic stimulus to counter its dire impact on economic activity. Unfortunately, in South Africa, the risks are more pronounced as our economy is already in a recession. From a fiscal perspective, there’s very little room for Finance Minister Tito Mboweni to provide meaningful stimulus to our struggling economy. The South African Reserve Bank has announced a one percentage point cut in the policy rate, which should bring some relief.
After ignoring the initial news on the virus, financial markets responded very aggressively as it spread – and the immediate economic consequences were easily observed. Global equities, as measured by the MSCI World Index, are down 30% from their peak recorded on 20 February 2020. Locally, shares are down 34% over the same period.
US treasuries initially reacted in an uncorrelated way as those yields declined aggressively. However, the strength in global treasuries was short-lived as government bond yields gave up all their gains over the past week. Commodity prices didn’t escape the carnage as the oil price fell all the way from US$50 per barrel to below US$25 almost overnight. The darling commodity of 2019, palladium, lost 43% of its value from its recent peak. The surprise to many gold bulls was that even the gold price fell 13% from its peak.
We argued from late 2018 that the global economic upcycle was in an advanced stage and that equity markets were similarly in late bull market territory. Unlike the bull market of the late 1990s and 2007, we didn’t consider equity prices to be in bubble territory. However, risks were starting to build. Within our equity portfolios we reduced the cyclicality by selling platinum shares, trimming diversified miners and increasing the cash levels marginally. None of these actions looked particularly smart, as platinum shares performed exceptionally well in 2019, Anglo American and BHP Billiton steadily advanced, and equities outperformed cash.
In the multi-asset portfolios, we introduced an underweight position in equities early in the year and mirrored the equity themes in these portfolios. It didn’t work for most of last year. As the equity bull market continued late in the year, with the benefit of hindsight we should have trimmed further, but as equity prices weren’t in bubble territory we believed we’d already reduced the risk in the portfolios adequately.
And then the virus hit financial markets.
One could argue that our portfolios were ‘correctly’ positioned, with higher cash levels and lower cyclicality. However, when an external shock of this magnitude hits economies and markets, no portfolio will have enough dollar cash. Although the positioning in our client portfolios was generally more defensive relative to competitors, it didn’t protect the capital value of portfolios over the short term. For older clients who rely on income derived from these portfolios, this is particularly cumbersome. It is, however, true that our client portfolios responded better than those of most of our competitors – particularly those who ignored valuation and favoured narrative.
The speed and magnitude of the sell-off in financial assets suggests that fear and panic drove investor behaviour. Extreme intraday price movements reflect desperate actions by market participants. Following in-depth discussions and stress-testing of individual company financial models, we at Sanlam Private Wealth have decided to use some of the cash in our equity portfolios to add to local equities and to reduce the underweight in equities in the multi-asset portfolios. Of course, we are very aware that some might argue that we are too early in adding equities to the portfolios given the continued uncertainty regarding the economic fallout as a result of the virus.
As the sell-off was largely indiscriminate, it also allowed for restructuring of the equity portfolios where it was possible to buy higher-quality assets at deep discounts, while we could reduce lower-quality assets. Our actions included the purchase of Anglo American, which now trades at a deep discount to our intrinsic value despite lower than cash market prices in our commodity assumptions. We’ve also added Bidcorp, which we sold earlier at around R320 per share. Of course, the Bidcorp model will be tested while the impact of the virus remains relevant for human behaviour.
In our multi-asset portfolios, we held substantial cash positions. As explained above, we’ve used some of the cash to buy shares. However, we also increased the duration of the fixed interest exposure following the sell-off in South African bonds. In short, we’ve used the opportunity to acquire quality assets at material discounts to intrinsic value.
As the humanitarian impact, economic outcome and resultant implications for businesses remain uncertain, many commentators and clients may criticise our decision to buy shares and increase exposure to government bonds. Analysts and investors will continue to wrestle with these issues. Our guess is that the narrative is only likely to change once a vaccine can be successfully rolled out to combat the virus. Before this happens, investors will have to deal with the derived negative economic consequences – which might be very ugly.
In time to come, we will no doubt look back at this crisis – as we did after 1998 in South Africa, 2001 globally and again 2007/8 with the global financial crisis – and recognise that financial assets traded at extremely deep discounts and provided attractive buying opportunities.
We’ve often said that a financial crisis creates unique buying opportunities as valuations are very attractive. We have taken the first steps and will continue to utilise expected continued volatility to enhance the growth potential in our client portfolios. Intellectually, this is easy to understand, but emotionally it’s very tough to overcome the fear associated with the crisis. It’s our firm view that our clients won’t regret these purchases when they look at their portfolio values in a few years’ time.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
WHAT CAN WE EXPECT?
Investment Economist at Sanlam Investments
THIS TOO SHALL PASS,
BUT WHAT THEN?
BAT: STILL SMOKING
AMID COVID-19 VOLATILITY
Senior Investment Analyst
A COVID-19 WORLD
Director of Investments
OIL MARKETS: THE GOOD,
THE BAD AND THE UGLY
Member of SPW Investment Team
TECH STOCKS: OPPORTUNITY
AMID THE COVID-19 CRISIS
Head of Global Equities
COVID-19: WILL SA BANKS
SURVIVE THE ECONOMIC FALLOUT?
JUNK STATUS FOR SA:
NOT ALL DOOM AND GLOOM
Director of Investments
South AfricaSouth Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStar
Rest of AfricaSanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth Mauritius
GlobalGlobal Investment Solutions
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.