If, like me, you watched in amazement as the local currency kept getting stronger against the Dollar and Euro, you might want to read the views expressed in a MoneyMarketing article on Friday.
Dave Mohr and Izak Odendaal, two Old Mutual Wealth investment strategists, take us on a global tour, provide a brief lecture on behavioural economics, and provide some practical insights to share with your clients who suffer from serious knee-jerk reactions to events in the markets.
Often, columnists in the media spark this “timing in the market” frenzy, when a cool head would be far more beneficial to most clients.
As Mohr and Odendaal notes:
Therefore, to begin with, it is important to remember that most of the gains in the rand over the past year or so largely represent the recovery from that collapse, though there are other factors that we’ll get into below.
Such massive collapses of 30% or so in the currency have occurred before, in 1998, 2001, 2008 and 2015. What these episodes have in common, is a global or emerging market financial crisis, meaning that the sharp decline in the rand was driven largely by factors emanating from outside South Africa, usually coinciding with a spike in the US dollar. What these episodes also had in common, was a strong recovery in the rand once global risk aversion abated.
The pandemic panic was just such an external episode, and it was completely unpredictable. When it turned out that the worst financial fears of Covid-19 would not materialise, the rand started recovering.
The big behavioural risk at that point would have been to extrapolate from the R19 per dollar level and assume the rand would only weaken further, and therefore invest offshore. From April 2020 to now, South African equities have beaten global equities by around 30%, local bonds have beaten global bonds by 40% and local property beat global property by 30% in rand terms.
The worst behavioural mistake would have been to take money offshore and then, being afraid of equity markets, hold them in dollar cash. While lagging local equities, global equities still returned 20% in rands. A dollar money market fund, on the other hand, would have lost around 20% in rand terms.
I strongly suggest you study this article and keep it with your “skietgoed” to talk some sense into panicky clients.