Top considerations for SA investors under the ‘new normal’

Last updated on 7th April, 2021 at 09:32 am

In the post-COVID-19 landscape, what local and global opportunities should you be looking out for as an investor? The experts share key insights and noteworthy trends.

The last week of March 2020 saw the fastest 30% market drop ever – quicker than those experienced during the Great Depression. A year on, in March 2021, investors are sceptical despite the gradual rebound that began in May 2020. So, in 2021, what are the smartest baskets to put your eggs in amid the continued uncertainty of the pandemic?

Opportunities are plentiful

Keep in mind the main asset classes available:

Cash
Bonds
Property
Equity
Offshore

Let’s start by looking at the first asset class: cash. The Reserve Bank’s aggressive interest rate cuts in 2020 have meant that money market investments are currently not viable, a key reason being that they can’t outperform inflation. Jaco van Schalkwyk, a Certified Financial Planner® at Plan-B BlueStar, says these cuts have pushed investors to look at cash alternatives. Here are some options depending on your time horizon:

Short-term investments
According to van Schalkwyk, if you’re looking for a ‘safer’ short-term investment vehicle, local income funds such as the SIM Enhanced Yield Fund provide exposure to bonds. The fund manages yield and duration risk very well. The bond yield is the amount of return you, as an investor, will receive in the form of interest on a bond, and the duration risk is the risk associated with the sensitivity of a bond’s price to a 1% change in interest rates.

Globally, interest rates are even lower than those in South Africa, so sticking to local bonds would also be a safer approach, while still increasing your odds of good returns.

Longer-term investments
For a longer investment horizon, you’ll find some good opportunities in equities and property. But before you invest, van Schalkwyk shares a key consideration: “A company’s share price could from time to time be totally disconnected from the true value of the company. The true value of the company should reflect future cash flows that that company is going to generate.” With tech giants like Tesla’s share price soaring tenfold in less than 18 months, it’s easy to get caught in the hype and put your money behind a company that’s achieving unprecedented short-term successes. But cash is king, and money talks, says van Schalkwyk. “Focus on the cash flow a company generates. If you pay a lot more than the cash flow the company is generating or will generate, you may be disappointed.” Working with a qualified financial planner can help you make sound investment decisions for the long and short term with an asset allocation appropriate for your circumstances.

In a similar vein, some companies’ share prices don’t reflect their real value. Patience is key if you invest in these opportunities. “There are opportunities to buy into companies that are under-appreciated and undervalued by the market,” says van Schalkwyk. “Understand, however, that it may require significant patience, as these investments could underperform the growth stocks that are [currently] shooting the lights out.” But distancing yourself from the hype and taking a different direction to the herd can be rewarding if you stay invested for the long haul.

Sectors
Research and investment analysts at Glacier by Sanlam believe local investment opportunities lie in infrastructure, agriculture and mining. “Some could argue that the South African-facing businesses are cheap from a valuation perspective and can do well as foreign [cash] flows come into South Africa,” they add.

If you’re looking to invest outside of South African borders, healthcare and technology are prime sectors to look at. “[There are opportunities in] infrastructure and real assets, as governments use these as a means to stimulate economic growth,” say the research analysts at Glacier. “When the world reaches herd immunity, which given the developed markets’ vaccine effort, then there is a possibility that financials and property could be good investment opportunities given how much they have sold off. This could be seen through a value lens.”

What’s trending?

We’re still uncertain
The COVID-19 vaccine is being rolled out worldwide, but that doesn’t mean we’re out of the woods. Well-considered decisions have always been part of a sound financial plan, but the uncertainty that persists about whether and how soon life will return to ‘normal’ means there’s no guarantee that sectors that were knocked off their feet during the height of lockdown will bounce back this year. “Will the virus prove harder to contain than we imagine, and will it take longer to roll vaccines out as we see other variants of the virus?” ponder the research analysts at Glacier. “In a post-COVID-19 world, are we going to go back to business as usual? Are airlines, hotels and leisure companies likely to thrive? If there are difficulties dealing with COVID-19, these sectors will be the areas most likely to have a financial crisis, and investors will continue to seek safety in ‘stay-at-home’ stocks.”

Emerging markets
A trend worth celebrating, and a precursor of even better developments to come, is the return of offshore investors to our local bond and equity markets. “We’ve seen inflows and net buying of South African government bonds and equities over the past three months, which is a reversal of the trend of 2020,” says van Schalkwyk. “That is very positive because, before foreigners enter our equity market, they start investing in the bond market because the risk and liquidity of bonds make them more attractive,” he explains.

Glacier research analysts add that the rapid digitisation to accommodate lockdowns in 2020 continues to grow into 2021 and could influence equity performance in emerging markets, as could the forecast of a weaker US dollar.

China
China has rebounded and emerged stronger after being the first country to weather the pandemic in early 2020. At the time of writing, the Shanghai Stock Exchange composite index had risen 21.83% in 12 months, while the International Monetary Fund projected a strong growth outcome of 7.9%. This is particularly positive news for South Africa as a commodity-producing nation; there is high demand for our commodities, and the rand is beginning to strengthen as a result, says van Schalkwyk. “The Biden presidency in the US is also important, as it will influence the trade tensions with China,” he adds. “Many companies that we invest in are exposed to the Chinese in some way. Just think of a massive company like Apple, for example.”

How COVID-19 accelerated trends

A shift in the property sector
As most people had to quickly transition to remote working, this had a negative impact on the demand for office space, commercial property and urban apartments. Interestingly, note research analysts at Glacier, [the transition to e-commerce] increased the demand for property sub-sectors such as manufactured homes (but with supply constraints), data centres, towers and industrial space. Hence the sector has shifted from more traditional sub sector to more niche sub sectors.

ESG investing
According to Morningstar, sustainable investing in the US reported net inflows of $20.9 billion in the first half of 2020; that was just short of the annual record of $21.4 billion recorded in 2019. Undoubtedly, sustainable investing is becoming more popular. “Responsible investment has been gradually gathering steam,” say Glacier’s research analysts. However, according to Fiona Reynolds, CEO of Principles for Responsible Investing, in the past two to three years there has been a shift – a significant acceleration in the uptake of ESG investing, and both a mainstreaming and growing of responsible investment philosophies and practices.

Want to learn more about ethical investing and whether it has a role to play in your portfolio? Read this.

The tech boom
One of the greatest transformations COVID-19 sprung on the world was rapid digitisation – both on the work and home front. Consider the speed at which McKinsey claim the world transitioned to e-commerce: 10 years of e-commerce adoption was compressed into just three months. Digitisation and e-commerce continue to thrive in the remote working reality. “Demand for tech stock is likely to continue to persist while consumers continue to be relatively more concerned about data privacy and protection,” say Glacier research analysts.

But, as van Schalkwyk points out, not everything worth investing in is going to be technology. “Have some exposure, but also look at the undervalued opportunities,” he says. “The prices of the tech companies are likely to more closely reflect the cash flow, and even exceed the cash flows that those companies can deliver compared to the ‘neglected’ companies.”

The vaccine roll-out
“Emerging markets like ours will probably take longer to recover from the pandemic, so it may take time for stocks or equities in certain industries to rebound and to start appreciating in price,” says van Schalkwyk. For the patient investor, this could be a great opportunity. In the US, pharmacies in the retail sector such as CVS are rolling out COVID-19 vaccines. Imagine if South African pharmacy retailers like Clicks followed in the same vein. Investors in those companies would benefit – and the vaccination roll-out could be fast-tracked, which would have a positive impact on other sectors like travel, tourism and leisure.

Younger people are taking more interest in investing
With direct-investment platforms such as EasyEquities and Satrix available, self-directed investing is becoming even more popular, especially among younger generations. Van Schalkwyk suggests the reason behind this is that people are thinking about the impact that COVID-19 has had. “It’s shaken our foundations and made it clear how big its financial impact was,” he says. “People’s curiosity about the topic has been piqued, and I think they are now looking at their monetary health and their wealth in a totally different way and asking, ‘But how am I protecting myself from what could happen?’”

Besides showing interest in learning more about protecting ourselves financially, younger investors are participating more in the markets because platforms like EasyEquities and Satrix make this more accessible. “Something like EasyEquities on the local front is proving popular because it allows fractional ownership of shares,” he says. What this means is you can still invest in giants like Amazon without having to fork out amounts that are beyond your budget. You can own fractions of shares with other investors in a stock, and you get to decide how much money you want to put behind a company.

The time to invest in South Africa is now

The rand is gaining strength, our government bonds are attracting foreign investors, and the returns on global investments are currently at a low. This bodes well for investment in South Africa, and now is the time to invest. “Valuation is on your side, both from a South African government bond perspective and South African-facing equity valuation perspective,” say research analysts at Glacier.

The hesitation among South Africans to invest locally is partly driven by fear about money being stolen, but van Schalkwyk makes the point that education and consumption of accurate information is key to making informed investment decisions. “We live in a difficult time when fake news is prevalent and spread so easily through social media, that it’s amplified and it’s all around us,” he says. “In South Africa there are plenty of opportunities, but if you have those mental blocks in the way, you’re not even going to consider investing. You need to make decisions based on facts.”

While offshore investment has its place in a diverse portfolio, he encourages investors to start with the ‘easy wins’. “These are your retirement fund, and subsequent to that, your other investments like your tax-free savings account and your other discretionary investments.” Also remember that by investing in JSE-listed companies, you can get good exposure, as they face outward to the rest of the world, with many earning the majority of their income from abroad.

Making rewarding investment decisions requires expert guidance from a qualified professional, who can assess your needs and find the right investment fit for you. Book a meeting with one today.