The impact of a potential greylisting – should investors be worried? 

Regardless of the outcome of the decision to potentially greylist South Africa, diversification provides the best protection, says Herman van Papendorp, Head of Investment Research and Asset Allocation at Momentum Investments.

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South Africa is in a position where the country must prove it is remedying its structural deficiencies when it comes to anti-money laundering and countering the financing of terrorism. If we fail to demonstrate satisfactory progress on these remedial actions by February 2023, a plenary vote of the global Financial Action Task Force (FATF) members will determine the fate of the country’s greylisting status. 

As such, local asset prices may already capture some degree of risk incorporating a potential greylisting, while the actual event would merely rubber stamp well-known problems. For instance, it can be argued that the cheapness of the SA bond market, as reflected in consistently high SA real yields in global comparative terms and relative to its history in recent years, as well as the cheapness of SA equity market valuations imply that a compendium of negative SA-specific factors has already been incorporated by local and global investors into elevated risk premia for these asset classes. 

For clients, emotive headlines featuring ‘greylisting’ and ‘bear markets’ often lead to harmful investor behaviour by enticing some clients to change their portfolios at the wrong times.

Moreover, we believe that global inflation, tighter global financial conditions and the risk of a recession will dominate global capital flows. With global themes likely to be a larger determinant of the outcome for SA’s asset classes, local idiosyncrasies, such as a potential greylisting, may be overshadowed.  

In any event, we remain steadfast in our view that a well-diversified investment portfolio as encapsulated in our outcome-based investing philosophy provides the best possible protection against any unforeseen global or idiosyncratic market events that may cause short-term instability. Furthermore, history has shown that staying invested throughout any market turbulence has been the superior strategy for long-term returns. 

With the FATF’s D-Day fast approaching, National Treasury has presented urgent amendments to parliament to satisfy the FATF’s requirements. However, many of the issues that the FATF raised fall outside National Treasury’s reach and rely on parliament, regulators and the criminal justice system to make the necessary amendments to place SA firmly back on the roadmap to becoming a well-respected partner in the global financial system and a domicile of choice for structuring cross-border investments into the rest of Africa. Aside from technical factors, the decision on greylisting SA depends on the FATF’s judgement of government’s political willingness to achieve sufficient progress in addressing the concerns highlighted.  

Nonetheless, regardless of the outcome of the FATF’s decision to potentially greylist SA, we believe this yellow card warning should serve as a wake-up call for SA policymakers, regulators and law enforcement agencies to convince the country’s international counterparts that these grey skies are merely passing clouds and it is worth their effort to maintain relationships in the interim as SA continues to build a more robust legal and compliance framework to remain competitive on the global stage.

Herman van Papendorp, Head of Investment Research and Asset Allocation, Momentum Investments

For clients, emotive headlines featuring ‘greylisting’ and ‘bear markets’ often lead to harmful investor behaviour by enticing some clients to change their portfolios at the wrong times. For example, investors on the Momentum Wealth platform destroyed 6.5% and 3.5% of their investment returns in 2020 and 2021 respectively, predominantly due to incorrect switching between funds¹.

Equity markets go up over time as rising company profits are reflected in higher share prices. But there are interim periods when poor operating environments cause profits to fall for most companies, driving share prices and hence overall market indices lower. 

An appropriate response by investors during such short-lived periods of market declines and a news cycle of ‘bad news’ is to focus on the investment rationality of long-termism. By concentrating on the reality that equity markets historically provided strong returns in the longer term, clients will be able to push back against their inherent cognitive recency biases to overplay short-term market declines and thus refrain from making unnecessary damaging changes to their portfolios.  

Investing is personal, and as long as clients remain comfortable that their financial goals are unchanged, there should be no need to make changes to portfolios that have been carefully and methodically constructed by their financial advisers to attain their objectives. The mere fact that equity markets decline from time to time, and that the news are dominated by negative stories like a potential greylisting, should not make clients feel obliged to react to these declines or events. 

Historical evidence has shown that it is far better for portfolio returns to rather be too passive than too active in adjusting portfolios in reaction to previous market movements. 

It is fittingly revealing that the most recent 2020 COVID-19 bear market does not even reflect on long-term annual equity graphs. Let this be a lesson to us all when dealing with the inevitability of market declines from time to time.


¹https://retail.momentum.co.za/documents/campaigns/effectofcovid/momentum-behaviour-matters-report-december-2021.pdf   

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).