Are we headed the same way as Greece?

 

Taking into consideration the recent rhetoric around our expanding fiscal deficit slippage and the stagnant economy, we look at an example of a country that had very similar circumstances and how they fared after they had been downgraded.

Graph 1(1) - Sept 2019.jpg

 

Not so long ago, Greek government bonds were deemed to be “uninvestable” and Greece was on the brink of exiting the European Union, with worrying levels of fiscal debt, endemic corruption, low growth, inflation, slow infrastructure development and high levels of emigration and unemployment. Deep despair and pessimism were prevalent and factored into asset prices, with citizens alike believing there was little hope, but how did this change?

 

 

 

 

Graph 2(2) - Sept 2019.jpg

Since then, 10-year bond yields for both Greece and the US have converged (Graph 1), with investors effectively requiring the same compensation to lend to Greek and US Governments.

Structural concerns which saw Greek yields spike in early 2012 haven’t been  resolved; only marginally improved, reminding South African investors that things aren’t always as bad as they seem and only a small improvement in seemingly dire conditions, can spur a strong pick up in investment returns.

 

 

 

 

The best time to invest proved to be the point of maximum pessimism and if    you had done so, at their low point in 2012, you would have made your money back over 9 times, a return of 40% per year.

 

Are South African investors focusing solely on the structural issues and not on asset prices, as in Greece in 2012? Fund managers believe that many assets are compensating us for the issues at hand, with pessimism being priced in. How did Greek prices normalise? When compared to SA, factors are slightly different however the same holds true, when asset prices get too low, the odds move further into investors favour. Historically, times like these have proven to provide good buying opportunities which offer the potential for strong long-term outperformance.

 

No one can predict when that slight improvement might trigger asset prices to normalise, thus it is therefore important to stick to your plan and stay invested through the cycles. We will help you avoid making decisions based upon emotions and falling victim to common investor biases.