Navigating uncertainty: Lockdowns and downgrades

Reza Hendrickse. portfolio manager, PPS Investments

Global outlook

Most major global economies began to stabilise over the course of 2019, with the International Monetary Fund (IMF) anticipating that global growth would pick up from 2.9% to 3.3% this year. Global economic activity has, however, ground to a halt. Compounding this issue is the oil price collapse, leaving a significant number of businesses and economies, as well as those most exposed to Covid-19, vulnerable.

Our previously constructive outlook on global growth is currently being challenged by unfolding developments surrounding Covid-19. To date, our view has largely been that the pandemic would have a sharp, but short negative impact on economic growth, followed by a quick rebound. The challenge is that Covid-19 has spread rapidly and has been far-reaching, resulting in a sudden stop in economic activity across the globe. We are therefore less optimistic around global growth this year, but expect to see an improvement further out, given the extent of monetary and fiscal support being put in place.

Local outlook

Coming into 2020, a key item on the agenda was the National Budget in February, and how this might have influenced whether Moody’s would ultimately downgrade South Africa’s sovereign credit rating or not. It was unsurprising when Moody’s finally lowered South Africa's sovereign credit rating to sub-investment grade, in light of the weak fiscal backdrop and challenges to economic growth.

Economic growth has yet to materialise locally, having recorded just 0.2% growth in real terms for the full year, which is a fraction of the prior year’s growth of 0.8%. The economic impact of Covid-19 is likely to lead to materially lower growth for the short-to-medium term at best. Against this backdrop, and with significant monetary easing abroad, there is further scope for local interest rates to be lowered, even after the most recent 1% cut, and for inflation to remain muted for the foreseeable future.

investing in uncertain times

Financial markets often price in negative developments swiftly to the extreme, while in contrast, good news tends to only gradually reflect in prices. However, we are in unprecedented times, dealing with both the fallout from Covid-19, the oil price collapse and closer to home, our credit rating downgrade.

We cannot say with certainty how the current situation will evolve; however, the very nature of investing involves decision-making under uncertainty.

While the equity market declines are indeed unsettling, it is important to remain level-headed. There is still plenty we don’t know, but we recommend filtering out the noise, and keeping in mind your individual long-term investment plans. If navigated sensibly with the guidance of your financial adviser, times like these often present some of the best opportunities from which to benefit over the long term.