Latest Momentum/Unisa research reveals real effect of COVID-19’s market jitters

South African households’ real net wealth decreased by an estimated R828.2 billion from the fourth quarter of 2019 (Q4 2019) to the first quarter of 2020 (Q1 2020), according to the latest results from the Momentum/Unisa South African Household Wealth Index, which were released today.

Johann van Tonder, researcher and economist at Momentum, notes that this estimated real quarterly decline is 52.5% more than the previous largest estimated quarterly decline of R542.9 billion, which was registered during the Great Recession (Q3 2008).

“The recent plummet in household real net wealth – from an estimated R7 043.6 billion in Q4 2019 to R6 215.4 billion in Q1 2020 – can be largely attributed to a sharp decline in the real value of households’ pension funds and other investments,” says Van Tonder. “The real value of pension funds declined by an estimated R427.6 billion over the quarter, while other investments lost value of R363.9 billion.”

Van Tonder explains that the reason for these declines in value is threefold:

• the negative impact of the worldwide COVID-19 pandemic;


• the subsequent lockdown, which in effect incapacitated the global and
  
  local economy;


• and South Africa losing its investment grade credit rating.

“Households’ pension funds and other investments were mainly invested in two asset classes: shares and bonds. The decline in the prices of shares and bonds were caused by worldwide fear and panic selling of these financial assets stemming from the spreading of the Corona virus.”

He goes on to explain that the subsequent decisions by governments, including the South African lockdown, in effect incapacitated economies as very little production was possible.

“Apart from the immediate negative effect on the prices of shares and bonds, the future impact of these decisions will be devastating for economies and households – as company profits will decline, while millions of households are expected to lose their income due to extensive employment losses across the economy, negatively affecting their ability to live properly and save for retirement and other goals.”

Added to this, he notes that the value of shares and bonds were further negatively affected by Moody’s decision on 27 March 2020 (the same day the lockdown started) to downgrade South Africa’s credit rating to sub-investment grade. “This therefore also had a negative impact on the real value of households’ retirement funds and investments.”

Since the end of Q1 2020, however, van Tonder says that international shares and bonds have recovered markedly on the belief that the worldwide economic recession will be over soon; that central banks will “bail” markets out; that governments will provide sufficient support measures to companies and households; and that economies will “open up” soon.

“South African share prices followed suit as many companies listed on the JSE earn the bulk of their profits abroad. This would have had a positive impact on the real value of particularly households’ financial assets (specifically retirement funds and other investments).”

However, Van Tonder notes that should the beliefs of market not realise, the prices of risk assets may retreat again – and this will negatively impact the real value of households’ assets. “This, in turn, will negatively impact the real value of households’ net wealth,” he concludes.

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