• Sherwin Pillay

The impact of recent market events on members’ retirement savings

The purpose of this communication is to explain to retirement fund members the impact that the recent market events have had on their retirement savings. We understand members may be worried about a recent sharp decline in the value of their retirement savings after seeing a rapid and an extreme sell-off of assets around the world, the fastest since the 1930s. This has led to shocking returns over the last three months, which will be discussed shortly. We will also discuss why this is not the time to panic or make any irrational decisions.

What has caused markets to crash?

Stock markets around the world have crashed from mid-February and into March because of fear around the impact of the spread of the coronavirus (COVID-19) on the global economy. In fact, March 2020 will stand out as one of the most brutal months in the history of global financial markets.

Locally, we have already had a struggling economy, a financial recession, a recent downgrade of South Africa’s credit rating to junk status, as well as ongoing challenges faced by the state-owned enterprises to deal with. Now the widespread uncertainty of the COVID-19 pandemic has negatively affected equity markets, emerging market currencies and our bond market. This has had a direct negative impact on the retirement and personal savings of many South Africans. Out of fear and panic, investors have largely sold off assets across the board in favour of holding cash during this time of uncertainty and fear.

What effect has COVID-19 had on investment returns?

The JSE Index graph shows the sharp sell-off on the JSE, the local market: over the period from 18 January 2020 to 20 March 2020 the JSE fell over 35%. It is worth noting that the JSE has staged a quiet recovery since 20 March 2020, regaining about a third of the losses suffered, as stock markets around the world responded to the stimulus measures implemented by a number of countries to support the economic downturn.

As can be seen from the table above, there has been a broad-based sell-off across a number of asset classes.

No asset class was spared, with the exception of cash and global bonds. The recent sell-off in financial markets would have led to a sudden decrease in your retirement savings, which also makes longer-term returns look bad.

At the same time, we saw a fall in global demand, and supply shocks as most economies reduced trade and businesses shut down production, in an attempt to contain the virus. The shutdowns resulted in a reduced demand for oil. An emergency OPEC meeting was held, with the intention to agree on reduced oil output. Unfortunately, Saudi Arabia and Russia could not reach agreement, resulting in an all-out price war, with both countries increasing rather than reducing oil production. In the end, we saw the oil price plummet from US$50 to around US$30 a barrel, because of increased oversupply in a market where demand was already low. The falling oil price, having collapsed by about 60% this year alone, makes it difficult for some oil producers in the world to service debt and interest repayments. For example, the Sasol share price has lost almost 95% of its value since April last year.

What are governments around the world doing?

Many countries have closed their borders and gone into lockdown, restricting activities to essential movement in an effort to contain COVID-19. Governments across the world are also trying to support their economies by various fiscal (spending levels and taxes) and monitory (money supply and interest rate cuts) policies. The US Federal Reserve cut interest rates aggressively to a range of 0%-0.25% and the US government also announced a $2 trillion package to provide additional liquidity and support financial markets.

In South Africa, President Ramaphosa declared a national state of disaster on 15 March 2020, also announcing measures to contain the spread of COVID-19. The South African Reserve Bank reduced interest rates by 1% in order to stimulate domestic economic growth and ease consumers’ financial stress by reducing credit payments. There are also a number of initiatives and measures put in place with funding from Government and the private sector. For example, a solidarity fund has been set up to assist the fight against COVID-19. Notably, Government provided R150 million in seed capital with Sanlam and the Motsepe Foundation, the Rupert and Oppenheimer families each donating R1 billion to the cause. Naspers has also since donated R1,5bn to assist in the fight against the virus.

What should members do in the current situation?

Although we are currently experiencing a very painful and tragic crisis, a humanitarian health crisis, this is not the first pandemic the world has been through and neither will it be the last. At some point we will come through to the other side of the pandemic. It is also important to understand that the sharp sell-off in markets we have witnessed since mid-February 2020 has not been based on investment fundamentals, but rather on fear and panic about the uncertainty of COVID-19 and the long-term impact it will have on economies and business. In uncertain times like these, investors typically panic out of fear and sell their assets such as equities and bonds causing massive losses.

The graphs below illustrate this well. Investors typically don’t earn the market return due to their emotional behaviour of ‘selling low out of fear and buying high because of greed’, or chasing past performance. Members also quite often make short-term decisions based on emotions.