Risk mitigation in the current economic environment

Risk mitigation in the current economic environment

– Tomas Blendulf CAIASM – Head of Cape Town Operations

The tragic and disturbing events unfolding in our country over the last few days, as well as the pandemic impact on the world over the last 18 months or so, certainly remind one of an (alleged) ancient Chinese curse. Just when our vaccination drive seemed to be picking up pace after its lacklustre start, and we saw promising signs as the judiciary held fast in South Africa, KZN and parts of Gauteng exploded into civil unrest and looting. Watching communities having to come together to protect their neighbourhoods is sobering (and uplifting) and offers a reminder of how thin the thread is that keeps everything together.

Of course, none of this is a particular surprise. The slow destruction of our economy post the Mbeki era, with anaemic growth and subsequent ballooning unemployment provide very fertile tinder. Desperate and hungry people have nothing to lose, and South Africa has the widest Gini co-efficient in the world. Add some crooked, threatened, or power-hungry politicians into the mix and you have your ignition source.

Globally, the pandemic has seen developed market debt balloon to unprecedented levels, with inflation fears currently stalking those markets. Lockdowns have devastated many businesses worldwide, whilst some have benefitted such as the mega tech stocks. Residential property prices in places such as New Zealand, USA, Canada, and the UK are skyrocketing. Meanwhile, the South African property market is in the doldrums, at best some areas are barely keeping pace with inflation. It is not just the capital value, rentals are under pressure with increasing default rates and higher costs of rates, taxes, and utilities. The days of double-digit annual growth in the SA property market seem awfully long ago.

Personal Financial Planning

Do you have an emergency fund to cover your living expenses for at least 6 months? It is a standard trope trotted out by Financial Advisors, but the events of the last few days illustrate just how important these provisions are. These funds must remain liquid & accessible, and do not necessarily have to be in a bank account. With current money market rates barely matching inflation, the use of some appropriate income unit trusts will at least offer some CPI+ return with minimal risk of drawdown in value (not nil!).

I am also seeing far too many sad interviews with business owners who have lost everything and have no short-term cover in place. It is just not worth being exposed like this. Short-term insurance is a grudge purchase by all of us, until it’s needed!

Life cover, and particularly income protection, are also areas not to be neglected. If you lose your job or your business, how will you survive while you rebuild or find alternative employment?

Personal Investment Planning

It does not matter whether you are in the accumulation phase of life or living off your savings in retirement. All South African investors must be diversified across local and offshore assets. Over the last few months there has been a lot less consensus between the analysts, fund managers and economists that I listen to regularly (with the possible exception of developed market bonds). Taking a diversified approach will help hedge out these risks, particularly our local country risk. That said, it has amazed me how well the JSE has held up through the days since these protests began. The risk of taking large positions in individual stocks, however, has been clearly illustrated by the drop in share price of companies such as Massmart and the listed property counters. The Rand too, has done relatively well considering. While it has slightly underperformed other emerging market currencies, most of the weakening over the last few days can be attributed to a stronger dollar fuelled by inflation fears. We will see where it goes from here, but I am pleased to see many local fund managers took advantage of the recent strength to increase their offshore exposure to the maximum again.

If most of your wealth is tied up in a rental property portfolio, you need to look very carefully at your effective return on investment, as well as the risks you may run if those properties are only in South Africa. I shudder to think what effect the current unrest is having on property values in KZN.

While the offshore exposure on our retirement funds (retirement annuities, preservation funds, provident and pension funds) is still currently limited to 30%, it’s important to understand that using locally listed Rand hedge stocks (companies that derive the bulk of their revenue outside South Africa) it’s still possible to create portfolios that have effective offshore exposure of 40-50% within these retirement wrappers.

No such limits on offshore assets apply to discretionary funds or living annuities. You can access offshore feeder funds via local platforms, without needing to make use of your annual offshore allowance. Direct investment into offshore markets is also relatively simple these days, with individuals able to transfer R10 million per calendar year, subject to approval via the application process.

South Africa stands on the precipice, but our future is not predetermined. It is reassuring to see that South Africans from all walks of life are standing together to reject this lawlessness and destruction. We realise that these events affect us all, whether you are directly or indirectly impacted.

Hopefully, this will serve as a wake-up call to the government, we need economic reforms and policy certainty to stimulate our economy and attract investment. We cannot borrow our way out of this crisis, we need to create conditions for real economic growth to reduce the horrific unemployment levels in this country. In the short term, we need to ramp up the vaccination drive (to have only about 10% of the population vaccinated at this stage just is not good enough). We urgently need to restore law and order so businesses can reopen supply chains. The UIF needs to step in and assist workers affected by the unrest as well as those industries decimated by lockdowns, while claims from SASRIA (at this stage they estimate these claims will amount to between R7 and R10 Billion) need to be expediently processed so affected business can rebuild and restore these lost jobs.

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