Director and Chief Executive Officer, Citadel
The world is facing one of its gravest crises in recent memory as it stares down Covid-19 and the wealth management industry has a key role to play by steadying the investment ship and navigating investors’ safely through this storm.
Global equity markets went from all-time highs to drawdowns in excess of 30% in near record speed. Global bond yields raced towards zero and beyond, while local bonds sold off sharply with South Africa losing its investment grade rating. The speed at which markets recovered has been as swift, and, for instance, the S&P is now down less than 10% year-to-date.
Some retired investors have seen nest eggs decimated with a negative impact on their potential future income, while others who are in the wealth accumulation phase of their lives may find that their jobs have been cut or adversely affected and their ability to save now in tatters. There is no doubt that lives have been upended and a new responsibility has been placed on the shoulders wealth managers.
In the 9 April 2020 edition of the Financial Mail, billionaire Chairman of Richemont, Johann Rupert refers to this as “an entire reset of our economic system”. If this is the case, then as wealth managers, we owe it to the country to demonstrate responsible leadership during this time and protect not only client assets as much as possible, but also stewardship of the country’s assets.
We need to demonstrate understanding around the dynamics of business closedowns, the loss of incomes, the psychological and financial implications of lockdown for clients and work through this with them.
Market risks include higher volatility, a global recession and falling returns
A concern for markets is that we have only seen the Covid-19 infection cases and death curves flattening off in Asia and not yet really in the Western countries. Worse, the world’s biggest economy, the US seems to be far behind the rest of the world in terms of number of cases and deaths, both of which have exploded, making Uncle Sam now the epicentre of concern for the world.
One of the bigger problems, beyond the coronavirus and its associated disease, is that the measures taken to stem the spread of both and to “flatten the curve”, being the societal confinement that is required, has meant a complete collapse in economic activity. All demand ceases and all consumption dries up and this is the crux of the problem in the world.
If we look at global growth, we are expecting a drawdown of as much as 10% in the second quarter of 2020. This is a once-in-a-lifetime destruction of global economic output and is a truly historic number. While we will have a bounce back, a global recession is unavoidable. Forecasts for US GDP in Q2 2020 vary between a 40% contraction and a 10% contraction, indicating just how much analysts are grappling with the potential effects of the crisis on the US economy. As a result, the Volatility Index has reached an all-time high of 83% and there is more volatility to come.
We don’t, however, believe that this will develop into a depression. Although the hit will be severe, once the economy is open again it should be able to recover at least some of its earlier momentum. While demand may have faltered, no infrastructure has been destroyed and demand will not stop completely. As it is able to, consumption will resume. Add to this global government and central bank responses which have outstripped the stimulus of 2008/9 and world economies are likely to pick up again reasonably soon once the Covid-19 crisis has ended.
The key for investors is not to panic
In turbulent times such as these, the most important thing is not to overreact or allow fear to override your investment strategy, or you may risk making the wrong decision at the wrong time.
Avoid panic selling. Liquidating equity after a 25% market decline means locking in your losses, and missing out on the potential to participate in any recovery. Additionally, history shows us that – no matter how deep the decline – this dip will pass. In this instance, the timing of a turnaround is a matter of when the virus stabilises, after which the market will start to rebound.
We are also encouraged that there is likely to be less risk to the banking system than during the 2008/9 global financial crisis. Lessons have been learnt from that era and we have seen both a tightening of governance and loosening of monetary policy. The South African Reserve Bank has surprised us with a 2% cut in South Africa’s repo rate while adding at least R1bn of liquidity to the economy through the purchase of government bonds. At the same time, the SARB has lowered the liquidity coverage ratio and the minimum capital requirement for banks. This will serve to aid the relief effort and boost the economy.
Communication is vital
Clients and the investing community at large are understandably anxious given the treacherous environment. Reaching them and supporting them is critical in these times, not only to educate them and ensure that they are not left stranded or at the wrong end of an investment decision, but to ensure that they are still able to meet their long-term financial needs.
Communicating directly with individuals becomes more challenging during lockdown conditions and obviously the face-to-face meetings need to be digitised. One of the consequences of the lockdown is that people are spending more time on their screens – from TVs to computers to tablets and smartphones.
This means using communication strategies to reach people via their screens, although this is not without risk. Already, the fledgling video-conferencing app Zoom has come under fire for concealing security flaws and putting confidential information and human rights at risk.
What is the future of lockdown?
The primary focus at present is fixing the health crisis and we have already seen an extension to the Level 5 lockdown period in order to achieve that, followed by a move to Level 4. Government has shown that it is not afraid to take the hard decisions when health and lives are at stake.
As we move through the lockdown levels, the economy will slowly start to reopen and rebuild, but nothing will happen overnight. South Africa is expected to stay in recession this year, with analysts looking to an economic contraction of 3.5% or even 4%. With a longer lockdown and a slow reopening, a further 2% could be shaved off that.
As the wealth management industry we need to be a part of the change that is required to secure the future of South Africa in a post Covid-19 world. Citadel has prepared for an open ended lockdown time frame and can cope with anything that eventuates.
This is the time to reassess business models, to put profits aside and to consider our purpose as our key priority. Let us use this opportunity as an industry to use the “reset of the economic system” as the chance to also reset wealth management for the greater good of the country.
