Investing & Recession
Depends on what you mean by a recession. Well, let’s start with a simple description thereof.
“Informally” definition of a recession
South Africa has been an excerption in that the growth levels have remained relatively flat while dipping in and out of technical recessions – described as two consecutive quarters of negative growth (see Table below)
Opportunities can arise during recessions
Opportunities are around all the time if you’re looking for them and welcome them when they present themselves. A recession can be the best possible time to begin investing because asset prices often fall hard. You can pick up stocks, bonds, mutual funds, real estate, private businesses, and more for far less than you could just a few years earlier. You can step in and pick assets up for a fraction of their value as other investors are forced to dump them.
While this may be the case – Again! South Africa is a special case in that the erosion in fundamentals “tends” to act as a stumbling block for prices to recover as well as they should after a contraction. Meaning while other economies may be picking up growth following a recession, investors tend to take a wait and see approach when it comes to SA. And this should come as no surprise, “things” such as persistent low growth, high unemployment, unstable power supply and policy uncertainty are the main deterrents for investment – after all stock prices are driven by earnings potential and in SA currently the earnings profile remains muted.
Got the heart? Then Invest in SA stocks
It takes courage to invest when the economy is down. You probably won’t buy at the absolute bottom. You’ll have to watch your portfolio fall a little further after you’ve made your investment. That’s why experts recommend that you only wade into the market through a dollar-cost averaging plan instead of pouring all of your capital in at once.
Due to the Covid19 pandemic SA’s stock markets may or may not have bottomed. Even worse SA’s growth has been diverging from the rest of the world’s growth―even relative to emerging markets. That said, there are risks that won’t simply go away like the Covid19―no pun intended, my point is that at some point the Corona virus will GO AWAY! (pun intended this time). But things such as; the downgrade risk, policy uncertainty, the unstable power supply and the forever present emerging markets contagion risk won’t.
So, why is that important? You might ask. Well, there is just no guarantee how long it will take for domestic markets to revert back to high levels. Obviously, there are key catalysts to gauge when that might be―the major ones being: policy certainty, economic growth rising, stable power supply and declining unemployment levels. You can do the math on these issues, just to give you a hint – your answer must include the words ANC in them.
Not to say there are no buying opportunities in SA, there are just no easy ones. There will always be opportunities, but they will require a careful consideration of the key catalysts and then a lot of waiting―long investment horizons. I can tell you now a long-term investment to me is ANNNNNNNNNNNNNC, get it?
On a positive note, when the economy is fully functional opportunities are plentiful during a downturn and more so in emerging markets. Currently emerging markets are characterised by growing population, growing economies = rising middle class (rising spending) and rising needs for infrastructure development = high employment opportunities and so on. All these are positive for the stock markets. The best bet is getting into funds that will give you exposure to foreign markets with growth.