A new study by insurance provider Momentum and the University of South Africa has found that households’ real net wealth had decreased by about R828-billion from the fourth quarter of last year to the first quarter of this year.
Momentum economist Johann van Tonder says this estimated real quarterly decline is 52.5% more than the previous largest estimated quarterly decline of R542-billion, which was recorded during the global financial crisis in the third quarter of 2008.
“The plummet in household real net wealth from R7.04-trillion in the fourth quarter of last year to R6.21-trillion in the first quarter of this year can be largely attributed to a sharp decline in the real value of households’ pension funds and other investments such as unit trusts.
“The real value of pension funds declined by an estimated R427-billion over the quarter, while other investments lost value of R363-billion,” he explains.
Momentum says the reasons for these declines in value include the negative impact of the worldwide Covid-19 pandemic, the subsequent lockdown in South Africa and South Africa losing its investment grade credit rating.
Van Tonder elaborates that households’ pension funds and other investments were mainly invested in two asset classes – shares and bonds. The declines in the prices of shares and bonds were caused by the worldwide fear and panic selling of these financial assets.
Additionally, the lockdown incapacitated economies since very little production was allowed.
Van Tonder points out that, besides the immediate negative effect on the prices of shares and bonds, the future impact of these decisions will be devastating for economies and households, since company profits will decline and millions of households are expected to lose their income – which makes saving for retirement and other goals unlikely.
Van Tonder further explains that international shares and bonds have recovered markedly since the end of the first quarter, on the belief that the worldwide economic recession will be over soon, as well as that a Covid-19 vaccine will be available before the end of the year.
This while central banks are helping to “bail” markets out and the expectation that governments will provide sufficient support measures to companies and households.
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 after the quarter ended on the real value of 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.
However, Van Tonder notes that, should the expectations of markets 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, as well as economic growth and employment creation.”