A year in review – what the South African economy has taught us in 2018

A year in review – what the South African economy has taught us in 2018

– Paul Damant, CFP (Director, Cornerstone Asset Management and Managing Director, Cornerstone Financial Services Group of Companies)

Let us consider the glass “half full” rather than “half-empty”.

2018 has undoubtedly been one the toughest economic years that South Africa has faced in a long time, and many individuals and companies are reeling from the effects felt by the hard slap of the technical recession brought about, among other things, by a complete mismanagement of our fortunes by the current ruling political party.

Although it has been difficult for each South African just to survive financially through this most difficult time, at Cornerstone Asset Management we remain positive about the future of our economy and will continue to work hard to build and grow the economy by providing expert investment advice to our clients. It’s with this attitude in mind, accompanied by the spirit of the festive season, that we choose to focus on the positive things the country and its people can learn from the past year’s economic changes.

We are all responsible for the growth of our economy

Whether it’s ensuring that they are registered to vote, saving more by spending less on luxury goods or staying abreast of financial news both locally and abroad, South Africans are becoming more and more aware of their role in shaping and growing the country’s economy. Although the South African markets have been plagued by massive volatility this year (in fact – over the last 4 years – to be more accurate), the rise in awareness of economic changes among the public is a positive step in the right direction and will surely assist in the recovery of the economy.  The SA Consumer Confidence Index, although having come off from the “Ramaphoria” high in January 2018, is still positive. So too with the SA Business confidence Index (RMB/BER).

Improving sentiment towards ourselves and our country is critical if we are to get behind our economy and force positive change. Whether you are an everyday hardworking employee, or a captain of industry, being an agent for change starts with thinking and acting positively.

Saving is vital, now more than ever

It’s common knowledge that saving is crucial in order to grow wealth and establish financial freedom, yet South Africans are notoriously bad at saving. In fact, in 2017 we were branded as some of the worst savers in the world, as reported by The South African 

However, with a raised economic awareness and a sense of economic responsibility, this might change. A recent article in BusinessTech shares information based on the Old mutual Millennial report that shows  Millennials, who make up around 70% of the South African workforce, are more likely to save than their parents and are more driven to seek financial freedom.

Or course we are not expecting that everyone will suddenly start saving substantial amounts each month and we acknowledge the massive obstacles that make it impossible for many people to save, but perhaps the economic turbulence of 2018 will inspire more people to save for the future.

There is light at the end of the tunnel…

Historically, the economy has always recovered and shown long-term growth albeit not always as fast as most of us would like. And although it’s hard to see the positive when one is living through depressed economic conditions, which are the direct result of the last decade of political economic sabotage, it’s imperative to remember that economic recovery will return. Just recently, we had the good news of a 2,2% hike in GDP and the substantial decrease in the petrol price. Our new president, Cyril Ramaphosa (and his cleaning team – Pravin Gordan, et al) is proving to be making the right decisions for the country  and positive change is slowly beginning to show through the cracks.

…but you need patience in order to experience it

Positive change rarely happens overnight.  Being patient, calm and collected are essential ingredients if we are to contribute to positive change. This is especially relevant when managing wealth. Unfortunately, the first and most common action taken by worried investors who see market values dropping, is to cash out their investments and invest it elsewhere – usually in a “safer”, lower risk option – such as cash.

This could be a big mistake as the cost implications (admin fees, penalties etc) and possible tax liabilities of cashing out can lead to a massive loss in capital. Furthermore, by the time you see growth returning to markets, and you then try and re-invest, the probability is quite high that markets might have already run are stabilised. This is the “fool’s gold” of trying to time the markets.

It’s is therefore advisable to remain patient and follow a disciplined approach to investing.

Also read: The importance of staying invested, even when the market is down

Citing from a recent Allan Gray newsletter:

“During the last 4 years, many investors are asking why we were not more heavily invested in cash given the out performance of cash relative to equities over the past one, three and five-year periods. It is true that cash has been a superior investment of late – and this is not the first time it has happened; cash has outperformed frequently in the past. However, equities have outperformed over more periods and, when measured over long periods of time, by a substantial margin. Over the past 20 years, which approximates the average investor’s time horizon, SA equities have returned 12.5% compared to 8.2% for cash. The level of under- or overvaluation of equities at a point in time gives an indication of how equities will perform relative to cash over the subsequent three, four or five years. 

At current valuations, and taking account of our analysts’ valuations, we think that the equities we hold should outperform cash over the next four years and give investors solid real returns. Given this valuation discrepancy, we are selling the Fund’s cash holding to invest additional money into equities. Importantly, equities are a real asset compared to cash. Historically real assets have protected wealth far more effectively than cash during periods of fiscal distress. Investors must always consider the potential outcomes, rather than just a single point estimate.”

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