SA households rapidly lost R800bn in real net wealth, but rebound seen

Covid-19 and weak economy to blame

25 May 2020 - 11:13 By TimesLIVE
Investments were hit hard at the start of the year but international shares and bonds have since recovered markedly, with South African share prices following suit as many companies listed on the JSE earn the bulk of their profits abroad.
Investments were hit hard at the start of the year but international shares and bonds have since recovered markedly, with South African share prices following suit as many companies listed on the JSE earn the bulk of their profits abroad.
Image: Reuters

South Africans' pension funds and other investments like unit trusts have been hit hard by sharp declines in the value of shares and bonds.

This is as a result of the worldwide Covid-19 pandemic; the subsequent lockdown, which incapacitated the global and South African economies; and SA losing its investment grade credit rating, Momentum/Unisa research reveals.

South African households’ real net wealth decreased by an estimated R828bn from the last four months of 2019 (Q4 2019) to the first four months of this year (Q1 2020), according to the institutions' SA Household Wealth Index, released on Monday.

Johann van Tonder, researcher and economist at Momentum, said this estimated real quarterly decline is 52.5% more than the previous largest estimated quarterly decline of R542.9bn, which was registered during the “great recession” of the third quarter of 2008.

“The recent plummet in household real net wealth can be largely attributed to a sharp decline in the real value of households’ pension funds and other investments such as unit trusts,” said Van Tonder.

“The real value of pension funds declined by an estimated R427.6bn over the quarter, while other investments lost R363.9bn.”

SUMMARY

The real value of households’ net wealth is calculated by subtracting the real value of their outstanding debt (liabilities) from the real value of their assets.

Momentum/Unisa estimates that the real value of household net wealth decreased by R828.2bn during Q1 2020 to R6,215.4bn. This decline can be attributed to the real value of household assets declining by R828.6bn, while their real outstanding debt remained almost the same as it declined by only R445m.

However, by the end of Q1 2020 (March 31 2020), the value of households’ real net wealth had recovered R426.7bn of its decrease – from its lowest point on March 22 2020.

Van Tonder said 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 coronavirus.”

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 said the value of shares and bonds were further hit by Moody’s decision on March 27 - the same day the lockdown started - to downgrade SA’s credit rating to subinvestment grade.

There is some hope, he signalled.

Since the end of the first quarter of this year, Van Tonder said, international shares and bonds have recovered markedly on the belief that the worldwide economic recession would be over soon; that a vaccine will be available before the end of the year; 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.”

Consequently, about 60% of the decline in the real wealth of households had been recovered by the end of April 2020.

He cautioned that should the beliefs of the market not be realised and confidence not restored, the prices of risk assets may retreat again – and this will lessen the real value of households’ assets. “This, in turn, will negatively impact the real value of households’ net wealth, as well as economic growth and employment creation.”