The impact of global events on South African investments

 

In the next part of our Investing in a Recession series, we look at how global events or market movements affect South Africa and investors.

A tiny event can have a snowball effect on other countries’ economies

As the adapted quote from Austrian aristocrat, Klemens von Metternich, goes, “when America sneezes, the rest of the world catches a cold”. So, for example, when President Trump tweets about sociopolitical issues in South Africa, the negative sentiment associated with his commentary can and did have an immediate effect on the South African rand.

The dangers of the rand crashing is that in the short term, we end up with a higher petrol price, which then results in higher inflation and higher interest rates, all of which cause lower growth for the country.

For foreign investors to invest in South African bonds, they need to have confidence that the capital invested in the bonds will be paid back. When the rand falls, it directly affects foreign investor sentiment in the long term and this could result in outflows from South African bonds, and less investment in the country overall. The country then ends up with lower tax revenue and increased budget deficits.

In response to the Trump social media commentary, the South African rand slumped 1.6% overnight against the dollar. Why such a strong reaction? Well, the tweet triggered concerns that the US could impose sanctions on South Africa. To see why this might have an impact, there are a few things you need to understand.

  1. A US sanction could affect AGOA (African Growth and Opportunity Act), and damage our economy

Early in September, we learnt that South Africa was not to be one of the countries to receive relief from steel and aluminium tariffs from the US. This could affect the country significantly when it comes to previous agreements under AGOA, which provides trade preferences for quotas and duty-free entry to the US for certain goods. According to the South African Revenue Service (SARS) website, between 1 January 2018 and September 2018, South Africa exported iron and steel to the value of R10.24 billion to the US1.   

The total value of South Africa’s exports to the US from 1 January 2018 to date has been R46.5 billion, while imports from the US for the same period amounted to R38.94 billion1.

  1. Emerging economies have a significant impact on each other

South Africa is part of a group of emerging economies known as the BRICS group, which includes Brazil, Russia, India, and China. Turkey is also considered an emerging economy. Emerging economies tend to have ripple effects on each other. So, for example, the recent US sanctions on Turkey caused the South African rand to drop.

When the Turkish lira crashed, it affected not only South Africa, but also Brazil, Indonesia and India. Earlier this year, the outlook for emerging economies was rosy and South Africa seemed to be on a high of “Ramaphoria” following the appointment of Cyril Ramaphosa as the new president.

The upshot of the emergence of a global village is that when there are major political or economic events across the globe, there tends to be a ripple effect in other countries. South Africa is no exception to this rule.


How does this affect your investments?

When foreign investors take a negative view of South Africa, not only does the rand depreciate, but the JSE takes a knock as well. This means that your unit trust fund investments, which include shares in South African equities, will see what is known as a paper loss.

This happens whenever the value of the units falls below what you paid for them. It is important to note that until you sell your shares, or disinvest, the loss has only happened on paper and is not viewed as an actual loss. If you simply stay focused on your investment plans and remain invested, they will recoup the paper loss over the long term.

However, if you panic and switch investments, the paper loss becomes a real loss and this is how many investors lose out. To reap the benefits of long-term investing, you must be able to tune out the market noise and remain focused on your final investment goals.


Why Discovery Invest should be your partner of choice

Despite the current difficult economic environment:

  • The Discovery Balanced Fund had a return of 9.07% for the year to end August 2018 against a benchmark return of 3.80%2
  • The Discovery Diversified Income Fund had a return of 8.47% for the year to end August 2018 against a benchmark return of 7.29%2
  • Our flagship fund, the Discovery Balanced Fund, was the 7th biggest flow taker in the industry, with net flows of R989 million for the second quarter of 2018, making it the 12th biggest retail fund out of more than 1 000 funds in the country (excluding money market funds), as per ASISA (www.asisa.co.za)3
  • The Plexcrown Survey for quarter two 2018 shows Discovery Invest retaining a place among the top five asset managers in the country4.        

These accomplishments should reassure investors that their investments are in the right place and there is no need to venture off track by reacting to short-term market movements or downward cycles.

 

Copyright Discovery Ltd is the licensed controlling company of the designated Discovery Insurance Group. Registration number: 1999/007789/06.
Companies in the Group are licensed insurers and authorised financial services providers.

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