At the beginning of December there was some cautious optimism about the prospects for 2020.
However, the commencement of load shedding and the realisation that Eskom’s problems are far more serious than we had been led to believe changed sentiment significantly.
These blackouts will have enormous consequences on the growth of the economy, job creation and household finances.
Load shedding will be a death knell for small businesses which were already struggling to survive in the declining economy.
Households will be redirecting their funds towards keeping the power on in the form of solar, batteries and generators.
Mining companies have already warned that they might have to close mines if the blackouts continue.
The likelihood of a Moody’s downgrade is now almost a guarantee.
However, it is not all doom and gloom. While we might be focused on the downgrade, the markets have already factored it in.
Investors do not act on concrete news but speculate on the likelihood of an event occurring.
South African government bond yields are trading more than 200 points above those of Brazil – and Brazil is already in junk status; in fact it is two investment grades below South Africa.
Tips on being financially independent
Have an emergency fund: When times are tough, households are a far more vulnerable to shocks. Use your bonus to provide a buffer for 2020.
Think of ways to earn a side income: Take the anger and frustration and turn it into positive energy. Think of a way to turn a passion into money, or use your skills to earn a bit of extra cash.
Even in a depressed economy there are still goods and services that people need or even small luxuries they indulge in when they cut back on larger lifestyle choices.
Diversify your investments: Often it is in the worst of times that the greatest opportunities are found. Don’t just stick all your money into cash. When it comes to your long-term investments have a diversified approach. Your investment strategy should have both local and offshore equities, bonds, cash and property. A balanced unit fund is a good starting point for your tax-free savings account.
If you are building your own investment portfolio, make sure you include offshore funds. Over time the best risk return outcome is to invest around 50% offshore. Consider alternative assets, especially those that focus on infrastructure or food security, such as cattle, farming or solar panels.
Focus on the positive: While you do not want to stick your head in the sand, be careful about the sources of “information” you read on social media.
Make sure you are reading factually correct articles. Stay away from angry negative people. They will drain your energy.
In other words, global investors are already being paid an additional 2% from South African bonds even though we retain a better investment grade than Brazil. Investors are well compensated for the risk they are taking.
A downgrade will still trigger a sell-off of South African bonds and an immediate weakening of the rand, as South Africa would be excluded from the FTSE World Government Bond Index.
Passive bond index funds would be forced to sell their South African holdings.
However, there are many active global funds that invest in junk bonds – looking for yield rather than quality of rating.
It is very likely they will step in and start buying – especially considering the outstanding yield they would receive.
In a world that is desperately looking for yield, South African bonds remain attractive.
So, rather than seeing the downgrade as a cliff from which we will plummet, some argue that a downgrade is exactly what we need to spur the government into action.
We should be far more concerned about the lack of growth in the economy. So far the government has done very little to stimulate growth.
Analysts argue that what is lacking is any move to make it easier and cheaper to do business in South Africa.
We need more private-public partnerships to facilitate investment in infrastructure and remove unnecessary regulation.
Perhaps the Eskom crisis combined with a Moody’s downgrade will be the electric shock needed to force the government to make growth its primary focus.
If that happens, South Africa’s economy would rerate quickly – we still have great businesses and skills ready to be deployed. Betting against South Africa might not be the only investment strategy.
So, how do you manage your money against this very uncertain, unpredictable backdrop?
If something does outrage you, take action, do something to bring change rather than just passively spreading negativity.
Make that your New Year’s resolution and 2020 will be a better year.