How to manage money during a global crisis?

In this series, our Old Mutual Wealth Investment Managers answer some hard questions and demonstrate how they do the hard thinking and work so that you don't have to. Their answers are based on an in-depth understanding of the local and global economy, financial markets, and the driving forces that will shape tomorrow.

Izak Odendaal, Investment Strategist at Old Mutual Multi-Managers discusses how you go about investing in a time of global crises.

For more information visit:
https://www.oldmutual.co.za/wealth/hq-investment/

Transcript

Old Mutual  00:02

Investing your wealth is a journey that demands skill, in depth knowledge, experience, and conviction from the investment manager. From you, the investor, it demands time, patience, and trust in your investment manager's ability. While investing is certainly rewarding, it can be complex. You will have questions along the way, and we're here to help you find the answers. 

In this series, our Old Mutual Wealth Investment Managers answer some hard questions and demonstrate how they do the hard thinking and work so that you don't have to. Their answers are based on an in-depth understanding of the local and global economy, financial markets, and the driving forces that will shape tomorrow.

Ian Fraser  00:44

Welcome to the podcast. It's great to have you listening and welcome from myself, Ian Fraser. We're talking crises today, and very much about how you go about investing in a time of global crises. They're all over the place at the moment, and it's been pretty relentless over the last few years. And we're all feeling a little bit sort of weathered, as it were. And certainly, when it comes to investing in all sorts of different things, we'd like to find out more about how crises are going to affect your investments. 

Let's welcome a strategist from Old Mutual Multi Managers, Izak Odendaal. First of all, it's great to have you on the podcast. So, welcome, Izak. 

Izak Odendaal  01:26

Thank you. 

Ian Fraser  01:27

Let's talk crises, something that we - certainly, I like to bury my head in the sand at times and ignore. But when it comes to your money, it's exposed to all sorts of crises. So, let's take a high-level approach and start right at the beginning about what type of crises we're talking about. And really, are they all the same? Do they have the same impact on our investments?

Izak Odendaal  01:51

Ja, so there are actually different types of crises, and the distinctions do matter. So obviously, at the moment, we're experiencing a geopolitical crisis or a war, you know, in Ukraine. And we've had these kinds of situations before. We had 9/11, we had the wars in the 1970s that led to the oil embargoes and a very similar kind of feeling to what we're experiencing right now. 

So, that's kind of one set of crises, then the other one, you could really just call an external shock, something that just comes out of nowhere. And I think the pandemic was obviously an example of that. It's not something that people could really foresee. We could prepare for it, but you're ultimately preparing for something you know little about, and you don't know how it's going, you don't know how it's gonna play out. 

Sometimes natural disasters can also be a global crisis. Rarely, because natural disasters tend to be quite regional. But for instance, the tsunami that hit Japan in 2011. I mean, that resulted in countries around the world shutting off nuclear capabilities, nuclear power capabilities. And the effects of that are now being felt. Because right now, today, Germany is heavily dependent on Russian gas, because it shut its nuclear plants, or it started shutting its nuclear plants after the Fukushima disaster in 2011. Typically, though, natural disasters are, you know, very regional. 

And then there's what you can call an internal crisis and a crisis that gets generated inside the economy. So, the first that I spoke about are outside of the economy, they are external, but you get crises that happen inside the economy. These tend to build up, and then it suddenly manifests in a crisis in the sense that, you know, markets go haywire. So, the classic example here would have been the 2008 global financial crisis, which really was the result of a buildup of debt inside the global banking system, households, pretty much everywhere, you know, there was just too much debt. And, you know, at some point, you reach a tipping point where the whole thing just cascades. And it resulted in a very, very sharp financial market crash, you know, the famous 2008 crash, but then also a very slow recovery. 

And I think that's in a sense, almost the worst kind of crisis for an investor, is when there's a financial crisis, because it means that the financial system post the crisis is very slow. People basically spend years licking their wounds, rebuilding their finances, rebuilding their balance sheets. And even though interest rates typically fall to very low levels, you know, there's just not much other recovery. And that was exactly the experience post the global financial crisis. 

And then a last one is kind of related to just bad management of an economy. So, for instance, you know, we've seen Zimbabwe up north and also Venezuela, you know, running into hyperinflation, and that really is just the result of very bad policies, very unstable politics. And clearly when you have that kind of environment, your money just loses value by the minute when there's hyperinflation or some variation on the hyperinflation theme. 

So, yeah, there are different types of crises, and they have different implications for short-term investment returns, but also longer term how markets respond and how they recover.

Ian Fraser  05:16

It's like, I mean, as somebody who's not educated but certainly interested in world economies, you know, I keep an eye on it all. But what is obvious to me is that this is a cyclical thing, whether it be, you know, an economic crisis or an external shock, as you spoke about, probably the most recent one the Ukraine, the war that's going on there at the moment, that's a geopolitical crisis. But these things are cyclical, and they happen as sure as day and night, you know, in the good times, we tend to act one way and in the bad times, as you say, we end up licking our wounds afterwards. But surely, there must be a way that we can understand that these crises are coming.

Izak Odendaal  05:58

Ja, so some - I mean, the economy does work in cycles. And, you know, and interest rates go up and down, inflation goes up and down. And so, you have these cycles, and sometimes you have pretty bad cycles. And that's pretty normal. I think a crisis event is something different from a normal cycle. A crisis event is when there's a major shock. There's a major shock that actually changes the way that people behave, the way that people think. 

You know, just to use one example that we probably all know of, you know, my grandparents' generation grew up in the Great Depression years and were very, very thrifty as a result,  almost painfully so. So that is the crisis leading to a change in behaviour that lasts a lifetime. And I think the pandemic might have similar long-term behavioural changes as a result. So, the question is, how can we prepare ourselves for these crises? Sometimes you can spot them. But specifically, economic crises tend to build up, they don't just appear out of nowhere. As I said, there's a buildup of debt, there's a buildup of some sort of other imbalance in the economy. And often, it's when times are good, that the seeds are sown for future instability. 

You know, quite contrary to how many people think, many people probably think that the riskiest time is when the headlines are bad, like today. But often the riskiest time is when things are going great because that's when we take on too much risk. We are reckless with our money, we take on too much debt, we invest in things that don't have a reasonable expectation of delivering a return. So ja, the economic crises typically can, you know, you can spot them, but you have no control over the timing. As I said, the global financial crisis, there was a long lead up to it. But no one could have said that, you know, Lehman Brothers would go bankrupt on the 15th of September in 2008. That was not you know - that precise moment where the whole thing just implodes, is not predictable. 

And similarly, you could say, the Russian war in Ukraine, you know, you could point now with hindsight that, you know, Putin was leading up to this for a long time, and so on, and so on. But I don't think anybody could really predict that he would invade Ukraine on the 23rd of February. So, from that point of view, the preparation for crises and these kinds of shocks to the system is not trying to predict them as much as making sure that you have a portfolio that can withstand some of these shocks. And also, potentially respond to some of the opportunities, because clearly when things go haywire, there are a lot of people who are forced sellers, there a lot of people who are liquidating their assets at any price. And that creates great opportunities to invest. I mean, the best time to invest in my generation would have been the bottom of 2008. You could buy, you know, equities, you could buy, you know, a whole bunch of assets very, very cheaply. 

So, if you had some cash on hand, you know, you could go haywire and you could have set yourself up for fantastic returns. The problem of course, is that at the bottom of the market, at the height of the crisis, no one wants to invest. People are too scared, you know, the headlines are too scary. And so psychologically, it's very difficult to say at that point, you know, when that fight or flight instinct is added, it's at its strongest, that's the point where you must actually invest. 

Ian Fraser  09:29

I mean, I'm just listening to you talk, and hindsight is a beautiful thing, isn't it? If only [laughs]. So, let's talk then about these risks and creating opportunities from these risks. Hindsight, of course, out the picture, we're looking forward and not backwards. So, how would someone like you as a strategist try to find these opportunities?

Izak Odendaal  09:52

Ja. So, typically, as I said, you want to kind of distinguish between once - let's assume that the crisis is underway, and you couldn't predict it. Then you want to ask yourself, what changes are underway that are temporary or permanent? And I think that's maybe the first way to look at it. 

Because if you take the pandemic, as an example, I think some of the behaviours will be permanent. The work from home situation looks like it's going to be more or less permanent, which has implications for how we use property, you know, so more residential, less office property. So, that is an opportunity that you can exploit. Whereas other parts of the pandemic behaviour are probably temporary. The fact that people didn't go on holiday, they are probably most likely to go on holiday once they can get the opportunity. You can only spend so much time in your living room or shuttling between your living room and your TV room, you know, so people want to travel again. So, when the shares of companies in the travel business really collapsed in 2020, I mean, that was potentially a very good time to buy them. But you'd have to be patient because, you know, the recovery didn't come in 2021 and in 2022, you know, it's only now slowly starting to get underway. 

So, I think that's one way to look at it, is to say what is the distinction between sort of short-term implications and long-term implications. And the other important thing is, typically when there's a crisis, you know, asset values fall very sharply. And without trying to get too technical here, you can try and gauge where a specific - whether it's a share or a property or a bond is trading relative to its long-term history and trading relative to some estimate of its intrinsic value. If you think a share is worth 100 bucks, but it's fallen to 50 bucks, you know, then that's probably a good opportunity to sort of, to buy, you know, to close your eyes and just buy. 

But again, as I said, psychologically, it's very difficult to make that distinction. So, when we're investing, it helps a lot that we are a team of professionals sitting together and we can kind of talk through the psychological worries of doing it and kind of look at the numbers as rationally and as logically as we can. And try and put the emotions to one side.

Ian Fraser  12:08

You know, that's a difficult one, the emotions that you talk about, but I suppose when there are people like yourself, who are sitting in a position where you are watching the markets, watching the news, watching everything that's going on, day in and day out, you tend to... I hate to say this, because, you know, but maybe you get an instinct as to actually where this might go and sitting with a whole bunch of people in a room who do the same thing. I guess there's power in numbers, right?

Izak Odendaal  12:39

There is. And I mean, just to be very clear, I get the same emotional response as you do when things are going haywire. You know, when the war broke out, when the pandemic first hit, I mean, all those emotions of fear and uncertainty, and, you know, seasoned investors also experience those emotions. 

I think the trick is to have a process that can guide you through those emotions and kind of put those emotions on one side. And it helps a lot to study history and to understand how previous crises have played out. Of course, no crisis is exactly the same as the last one, you know. So obviously, when the pandemic broke out, all of a sudden, there's this huge interest in the 1918 Spanish flu. And no one cared about the Spanish flu for many, many years. But suddenly, it's a hot topic of study. So, it helps to look at previous episodes, how they've played out, because although the economy changes quite a lot over time, human behaviour doesn't change. 

So, if you look at, you know, now reading some of the reports of the 1918 Spanish flu, you can see a lot of the issues that have resurfaced with a pandemic were present back then. The resistance to wearing masks, for instance, I didn't know that, but it was a big issue, and so on. So ja, I think human behaviour doesn't change that much over time. And it's the way that humans respond which ultimately manifests in the way that markets respond, because ultimately, markets are just collections of human beings, making buying and selling decisions. So, it really helps to know how some of these past crises have played out. And importantly, also how some of these past crises, in most cases, the worst case scenario does not materialize. 

And I think that also helps quite a lot, because clearly, we are all still here, and if you take a view of how our markets have performed over the long term, I mean, even in South African markets, even if you look over the last 50/60 years, and I mean we've had major domestic crises in this country, we tend to forget about them, but we had, you know, political issues, major political issues, economic crises. And through all that time, you know, you were still able to earn decent investment returns just by doing basics of investments, just being properly diversified, taking a long-term view, don't overextend yourself in the good times, don't panic too much in the bad times, you know, those kinds of basic things would have served you really well, even though South Africa has a history of being quite volatile.

Ian Fraser  15:10

Ja, that is sage advice. I love all of that. I could talk to you for another hour about this, to be perfectly honest, because it's an unlimited, interesting subject to chat about. Investing in a time of crises, it's a hot topic, which, sadly, we're all facing at the moment when it comes to Ukraine and Russia. But there are all sorts of other factors as well. Izak, let's leave it there. Strategist at Old Mutual Multi Managers, Izak Odendaal, thanks for your time on the podcast and thanks for your insights as well. 

Izak Odendaal  15:41

Ja, thank you. 

Old Mutual  15:43

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