May 13, 2020
With an estimated one third of the world’s population under lockdown and many regions closing their borders, the impact of the coronavirus (COVID-19) pandemic has been unprecedented. This human crisis and the associated demand shock coincided with the Saudi Arabia- and Russia-led oil price war and subsequent collapse in the oil price. Market weakness itself then became the third shock, with liquidity drying up as investors desperately sought to raise cash and de-lever.
These three shocks combined to result in the massive price action and dislocation across all asset classes, sealing a quarter that is one for the history books. The numbers reveal the magnitude. The S&P 500 Index experienced its fastest sell-off in history, shedding 30% in 22 days. This is only comparable to two other times in history – the start of the Great Depression in 1929, when it took 31 days to fall by 30% and the Black Monday stock market crash in 1987, when it took 38 days.
Over the first quarter, global markets, as represented by the MSCI All Country World Index, fell 21.3% in dollar terms. The rand shed a staggering 27.7%. The only silver lining to that dreadful number would be if you had had some exposure to offshore equities. The rand weakness translated into a 9.9% return from global equities in rand terms. The All Bond Index ended the quarter 8.7% weaker, but it lost 10% for the month of March, its worst month in history. The Moody’s downgrade of South Africa to ‘junk’ status on 27 March clearly put further pressure on our domestic bond market. The All Share Index mimicked global markets, ending the quarter down 21.4%.
Unsurprisingly, many investors panicked and scrambled to the perceived safety of cash and fixed income assets. When looking at the flows in the collective investment schemes industry over the last two months, it is clear that people either moved wholesale into money market funds or into bond funds. The big losers over the quarter were the multi-asset high equity and low equity categories.
What should investors be doing? Ultimately, the holy grail in this environment is a calm client, a good independent advisor and an experienced asset manager. Ideally, the investor who could lay claim to this combination would have had their portfolio structured correctly for their long-term outcomes and would therefore be doing nothing. The problem is that with so much going on around us, it is psychologically incredibly difficult to do nothing.
For you as advisors, it is important that you keep communicating with your clients so that they know you’re thinking about them. Importantly, be sure not to change a good plan based on short-term market shocks.
Useful support for the argument to stay invested is an article in this issue of Taking Stock by Paul Hutchinson, in which he researched the last eight global crises, and the returns you would have generated if you had stayed invested (even if you had chosen the worst possible time to invest), versus switching in and out of the market.
We are pleased with our performance across our range of funds. Key to providing these outcomes in our equity and multi-asset funds was that we were largely invested in very resilient businesses with strong balance sheets, while in our flagship Ninety One Diversified Income Fund, our portfolio managers demonstrated that they could stay true to the fund’s mandate to ‘participate and protect’. Despite the All Bond Index losing 8.7% over the quarter and many peers ending in negative territory, the Ninety One Diversified Income Fund posted a small yet positive return. Our Quality range of funds, which includes the Ninety One Cautious Managed, Opportunity and Global Franchise Funds, also showed resilience, continuing to provide dependable returns for investors.
While the market rout would have dented most investors’ pockets, pensioners dependent on their living annuities for income are potentially the hardest hit. We have fielded many questions around living annuities, and in this issue of Taking Stock, Jaco van Tonder addresses some of these concerns.
I would like to end this note with a quote from a letter by Hendrik du Toit, our CEO:
“On 1 April, Ninety One entered its thirtieth year, a year that will be remembered for the demerger of our business from Investec Group, our successful listing and rebranding, and for COVID-19 and the market reaction to the lockdowns across the world. Challenging times.
“Ninety One is a business that thrives in periods of change. We are energised by the part we have to play in making sure that the world gets back to work, both as stewards of your capital and as a responsible corporate citizen. To do that, we will continue to focus on our primary role as capital allocators, supporting businesses in their hour of need as investors, while contributing towards national fundraising efforts in support of the battle against COVID-19. It is time to act rationally and calmly in the interests of all our stakeholders.“
Remember, we are in this with you. Together.