Investing trends during a recession

 

In the next part of our Investing in a Recession series, we look at some of the more common investing trends during a recession. When the economy is going through a recession, investors are likely to see lower, and in some cases, negative investment returns from asset classes.

In a report released in July 2018, the International Monetary Fund (IMF) noted that despite the weaker-than-expected first quarter in South Africa, the economy is expected to recover somewhat over the rest of 2018 and into 2019.

However, by early September this year, the media was reporting a “surprise recession” on the back of data from Stats SA which revealed that despite high optimism after the appointment of Cyril Ramaphosa as the South African president, South Africa’s economy had shrunk by 0.7% in the second quarter of 2018, after a contraction of 2.6% in the first quarter of the year.

During periods such as this, there are several common knee-jerk reactions by investors that could potentially derail their long-term investment goals.


Investment trend 1: Flight to safety

During volatile periods, there is often a trend where investors channel their funds into the cash asset class rather than equities, through interest-bearing portfolios. This trend appears to be driven by investors adopting a wait-and-see attitude in a volatile market while reaping the benefits of what is perceived to be a safer asset.

Statistics from the Association for Savings and Investment South Africa (ASISA) show that for the 12 months to June 2018, the SA Interest Bearing sector recorded net inflows of R32 billion, with R31 billion going into SA Interest Bearing Short Term portfolios1. These portfolios are typically less volatile since they are mostly invested in cash instruments and are characterised by a regular and high level of income.

The problem with this scenario is that with interest rates at current rates, and after adding fees and taxes into the equation, the investors who have adopted the wait-and-see approach run a high risk of earning returns below inflation. On the other hand, investors who stay the course in equities and listed property can continue to enjoy inflation-beating returns over the longer term.

Something to consider: In the current environment, investors can consider defensive stocks with healthy dividend yields.

These investments are considered defensive as these companies are able to continue earning profits even when economic activity (growth) slows down. These are companies that typically supply items that consumers would continue to buy even when they are trying to cut expenses.


Investment trend 2: Disinvesting or cutting back on investment commitments

As the recession continues and the cost of daily living goes up, investors are likely to start cutting back on expenses in their budget. Unfortunately, money that has been saved or invested is often disinvested during a recession.

Something to consider:

  1. The importance of an emergency fund comes in here as this means investors would not have to disinvest from their long-term savings
  2. Losing out on compound growth should also be a deterrent for making a withdrawal or disinvesting ahead of schedule.

For example, from age 25, Xoliswa saves R4 000 a month in a unit trust. It’s difficult, but she has a lot of self-discipline. Over time, the unit trust generates an average return of 8% a year. After 10 years, her investment will be worth R725 146. In total she’s put away R480 000, but the rest of that growth (R245 146) all comes from compound interest. At this point, Xoliswa decides to stop her monthly contributions. She leaves compound interest to work, and when she’s 60, her investment will be R4.97 million.

  • The amount Xoliswa contributed in total = R480 000
  • Her total investment value at age 60: R4.97 million.

Mark is 35 when he decides to start saving for retirement. He saves the same monthly amount as Xoliswa (R4 000) in a unit trust and earns the same average return of 8% a year. He starts later than he planned, but he's certain he will catch up to Xoliswa; he has 25 years until he retires.

When he’s 60, however, he will have R3.7 million saved. Compounding did the trick for him too, but in total, he has contributed R1.2 million and has earned R2.5 million.

  • Total amount Mark contributed = R 1.2 million
  • His investment value at age 60: R3.66 million.

c. Investors can also look for providers that can help them save fees on their investments. At Discovery Invest, clients can reduce the admin fees on their retirement savings to zero, or they can get up to 20% extra for their retirement.


Investment trend 3: Panicking and moving money or investments offshore

Investors may consider this strategy since the recession is local and global developed markets may offer better opportunities.

Something to consider: While offshore investments should always form a percentage of a well-diversified portfolio, investors should consider the currency of their liabilities. If investors are based in South Africa and their liabilities are in rands, it does not make sense to have all their investments based offshore. The percentage that is taken offshore will differ between investors, based on their risk profile.


Why Discovery Invest should be your partner of choice

Between the start of the year and the end of August 2018, the JSE All Share Index gained 0.3%. Over the same period, the All Bond Index returned 4.5%, SA Cash gained 4.8% and listed property fell by a whopping 20.1%.1  Despite this volatile environment, the Discovery range of funds have provided good returns:

  • Discovery Balanced Fund: had a return of 9.07% for the year to end August 2018.2
  • Discovery Diversifed Income Fund: had a return of 8.47% for the year to end August 2018.2
  • Our flagship 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 country.4

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

 
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