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Short-term market pain could lead to long-term gain

Brutal selloff is not all bad news for investors

Asset managers are eyeing the shares of good businesses they say have become cheaper .

Asset managers warn of further volatility and market risks, but are upbeat about their chances of navigating these. Picture: 123RF/DENIS PUTILOV
Asset managers warn of further volatility and market risks, but are upbeat about their chances of navigating these. Picture: 123RF/DENIS PUTILOV

As brutal as the selloff on financial markets was in recent weeks, it was not an overreaction given the economic pain that is likely to follow, Karl Leinberger, chief investment officer at Coronation, says.

Managers widely acknowledge that the coronavirus will have a huge impact on economies around the world.

Stanlib economist Kevin Lings warned of a global recession as the 10 worst-affected countries contribute more than 50% to global economic growth.

But while the headline news was dramatic, asset managers making presentations for the recent virtual Investment Forum were calmer, many eyeing the shares of good businesses they say have become cheaper and updating return expectations.

They warned of further volatility and market risks, but were upbeat about their chances of navigating these.

Leinberger was one of many top local and foreign investment professionals who made presentations for the Investment Forum to auditoriums emptied by the coronavirus's arrival in SA.

The managers made their presentations to cameras after attendance at the conference by about 1,700 financial advisers was cancelled. The organiser, the Collaborative Exchange, made the presentations available to advisers virtually.

Leinberger said that as dire and depressing as things are at the moment, it is worth remembering that we have lived through financial crises before. Although no two crises are the same, you need to ask who made the right long-term decisions, he said.

After the rand's radical 70% fall in 2001, it fully recovered after 14 months, he said.

And during the great financial crisis in 2008, the JSE fell 40%. Just five months later, when nobody expected it, markets started to recover in an explosive manner, he said.


40% - The amount by which the JSE fell during the financial crisis in 2008. Just five months later, the markets started to recover in an explosive manner.

In 2008, people expected a great depression and for the banking sector to fail, but it didn't happen, he said.

The second thing to remember is that as prices are falling now, we are swimming in a large number of assets around the world that are trading meaningfully below what they are worth, he said.

While the markets have reacted in a brutal manner this time, with the 20% correction in the S&P500 being one of the fastest in history, this crisis will pass but will present a stunning opportunity to those who are willing to play the long game, he said.

"Market snapbacks from these kinds of crises are typically dramatic."

Jimmy Elliot, head of multi-asset in London for Ninety One (formerly Investec Asset Management), said the global market declines caught everyone by surprise and it would have been difficult for the market to get ahead of an event like this.

"I don't think anyone has seen a demand-side shock on a global basis like this," he said, adding that the impact on demand in the economy was probably worse than the impact of the global financial crisis.

Both Elliot and Leinberger admitted that despite them consulting epidemiologists there are many unknowns ahead. Lings, for example, warned that nobody knows if there could be reinfections when people begin to return to work in China.

Coronation is expecting waves of infections to last for about a year, and a recession. It is particularly concerned about the US's complacent response, the spread to impoverished parts of the world in Asia, Latin America and Africa, Leinberger said.

It is also deeply concerned about the impact on SA's economy, which is already in a recession.

Some of SA's best companies today are stunningly cheap.
Coronation CIO Karl Leinberger

Leinberger said Coronation had a conservative 20% exposure to global assets in its multi-asset funds as global markets were fully priced. Last month's selloff left markets pretty fairly priced but Coronation is looking for more "capitulation" before it buys.

As the crisis matures and enough of the risks are priced in, Leinberger said Coronation will look to start to buy shares even if it brings about some short-term pain (or underperformance).

He said while Coronation remains deeply concerned about the country we live in, share prices are low and ultimately the investing price is what matters.

"Many high-quality South African stocks are trading on very high compelling dividend yields, and very low multiples - some of SA's best companies today are "stunningly cheap", he said.

Elliot said it did appear as if effective containment measures were leading to a flattening off of new cases in China, Singapore and Korea and there was some evidence that it takes six weeks before the rate of new cases comes down.

He said that some time in mid-April, after a possible flattening off of new cases and fiscal stimulus from governments around the world, the market may take a different view on global demand recovering.

Managers meantime need to take advantage of buying high-quality corporate structures - whether that is in the equity or bond markets, because there is a real possibility that as Europe moves into the summer, the market will respond positively, he said.

Shaun le Roux, portfolio manager at PSG, said as prices are falling, PSG is looking to buy the shares of companies with a strong competitive edge and good management trading at a share price that offers a margin of safety because it is below that of the true value of the business.

Le Roux said PSG believes times will be volatile and there will be unforeseen events. Some companies will go to the wall.

But he also believes the stocks PSG has chosen will do well when some of the "crowded" or popular stocks will struggle.

Speaking on a panel about index-tracking investments, Eugene Visagie, portfolio specialist at Morningstar Investment Management, said global passive investments provided by BlackRock, State Street and Vanguard had collectively lost $2.8-trillion in the past first three weeks of March.

Kingsley Williams, chief investment officer at local passive investment provider Satrix, said when you invest in equity market index trackers you need to understand the risks of investing.

These kinds of corrections and crashes do happen in equity markets.

When you invest in equity markets for the long term you enjoy a premium return, but you must be able to ride periods of panic, uncertainty and heightened volatility, he said.

Over the past 25 years to the end of last year there have been three crises - the emerging-markets crisis in the late 1990s, the dotcom crisis in early 2000 and the great financial crisis in 2008.

Despite this, the JSE has over this period to the end of last year delivered returns in excess of 13% a year - a real return of 7% after inflation of 6%, Williams said.

As investors we have a strong bias to the recent past, but we must take a step back and look at the long term, he said.

Keep cool and stick to your plan

It is easy to panic in times like this, but it is best to stay focused on the long game, says Karl Leinberger, chief investment officer of Coronation.

Morningstar Investment Management MD Victoria Reuvers says the professionals who are managing your money have calm temperaments and are sticking to their investment processes.

The markets' moves are providing them with opportunities to buy quality assets on sale, she says.

Now is a good time to invest, she says. If you have money in the market, now is a good time to stay invested.

Reuvers says we should focus on the things we can control, like good investing behaviour.

Leinberger quotes David Nelson, the CEO of leading US asset manager Legg Mason, who says in times of stress it is easy to abandon long-term plans as your decisions are driven by instinct and emotion - but "investment decisions made in this state are often emotionally satisfying in the short term but financially injurious in the long term".

- Business Times Money