A blueprint for financial survival

In the wake of the credit downgrades by S&P Global Ratings and Fitch, I spent most of the weekend scouring the newspapers and websites that I normally frequent trying to find any worthwhile articles on practical advice for the man-in-the-street on what to do with their investments. 

While there were reams and reams of words written on the downgrade and the macroeconomic impact on the country, I did find very little relating to what Joe and Mary Soap should do, if anything, with their investments.

By and large the odd bits of advice tended to be “don’t panic” and “stay true to your investment plan”, by the spokespeople for the local investment industry. That’s like saying hold on to your beach umbrella in the face of a tsunami bearing down on the bathers on the beach.

For this is a massive financial tsunami bearing down on millions of hard-working South Africans who are only trying to do the best they can. Let’s not beat about the bush.

It is my view — one that I expressed on several radio stations last week — that we we are facing a five- to ten-year recessionary period of no or low growth.

The chances are also very good, depending on what happens in the next couple of months when Moody’s – the third of the Apocalypse of the Credit Ratings Agencies Horsemen — reports back on SA’s credit rating, that our financial markets could react violently negative to this news, more than it has up to now.

The outcome of their 30-90 day assessment of South Africa’s financial health is going to be critical and anything government says or does during this period will be carefully scrutinised by Moody’s as well as S&P that also reports back in June.

Equities not always best in the long run 

The investment industry in SA has a historical bias towards equity-based investments and an aversion to cash. The reason for this is not hard to find as the fees earned on equity-linked investments across the board are substantially higher than what can be charged on a cash or cash-type of investment. Over time this bias has worked in favour of investors as the long-term returns on equities have been substantially higher than returns on cash. About that there is no debate.

But returns on cash over the past one, two and even three years now have matched and beaten the returns of the JSE All Share Index. I cannot see the returns of the JSE going forward beating cash unless there is a massive further weakness in the rand exchange rate to the outside world. We have a stock market heavily geared towards rand weakness.

The starting point for any investment recommendation or advice therefore is the risk profile and tolerance to risk of the individual investor. Only the investor and his or her investment advisor will have any idea of what that is. 

I shudder to think what all those DIY- and index-tracking investors are doing right now with their investments. Hell, I need a good investment advisor in these turbulent times, and I do this for a living!

As I stated in my previous Moneyweb column, I am not giving investment advice. Also the Fais Act (Financial Advice and Intermediary Services Act) does not apply to columnists, as some churlish Moneyweb reader seemed to suggest last week. This is an opinion piece (free speech is still protected, by and large) and what you do with it is your business.

 A blueprint for financial survival

Here is what investors need to consider (IMHO) to deal with what is about to hit our financial shores in the next weeks and months:

1.       Sell or dispose of all non-income producing assets such as leisure properties/beach houses/caravan/boats/quad bikes. Anything to do with your ego needs to go. Convert it into cash or reduce your debt.

2.       Carefully calculate the return you are making on those buy-to-let properties you might have. If you are not yielding 6% or more you need to sell, immediately. With bond rates going up and property values declining further — coupled with tenants paying less and less — you could soon find yourself in negative equity.

Negative equity, you may ask? That’s when you owe more than the value of your property to the bank. That’s when the financial storm really starts getting interesting.

And if I am correct and we have a five- to ten-year recession unless the government comes to its senses and pulls us and itself out of this financial kamikaze dive – property prices will decline further in real terms over this period, in some areas drastically so. Local banks are absolutely terrified that SA’s property market moves into such a phase as this will put further risk on banks already under the financial cosh.

3.       Do a full and honest assessment of all your investment portfolios. Personally, I would move all my Regulation 28 investment portfolios 75% into cash and 25% into offshore equity-based asset swaps. This is the best place to have large cash balances as you don’t pay tax on any interest earned. This would include pension/provident funds/ retirement annuities and preservation funds.

4.       If I had a living annuity, which I have, it would also – depending on risk profile – be a combination of cash or offshore investments. Mine is 100% in two asset swaps – MI Plan Global Macro and Counterpoint Global Equity – but hey, that’s me. I am drawing 2.5% but if I was drawing more I would have some local cash in the portfolio to reduce the volatility.

5.       My share portfolio should have the maximum geared towards offshore investments. My preference would be towards offshore companies in sectors we don’t have in SA, such as Google, Tesla, Facebook and Apple, for instance. Local companies without an offshore earnings boost — such as retailers, building companies and transport — will struggle to maintain margins and profitability during recessionary times.

6.       If you were going to buy property, buy it in the Western Cape. The property market needs the benefit of a demographic dividend to drive prices higher. The WC is currently the beneficiary of a massive demographic shift to the Cape, but at some stage that will also start tapering off. 

7.       If I had some spare cash that I could put away for more than five years, it would go offshore, even at these levels. Make use of your annual travel allowance or if you have more, apply for the foreign investment allowance of up to R10 million per year, per individual. How long this concession will still be around is anyone’s guess. My guess? Not very long.

8.       If you were worried about valuations on Wall Street, you could opt for a structured product that offers you 100% guarantee of capital. Speak to Investec who have just launched another in their series of capital guaranteed offshore products.

9.       Hold on to your job and postpone your retirement for as long as you can. This is not the time to be changing jobs just because your feelings were hurt by your immediate boss requesting a better performance or higher sales targets from you and everyone else in the company. Any job you go to will have the same issues.

10. Take up mountain biking or any other sport that reduces stress. Stress levels are about to go sky-high. I have, and it has saved my life.

Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at magnus@heystek.co.za.

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