Emerging markets offer new vistas for investment growth
WHENEVER investors think ‘diversification’, especially international diversification, they tend to default to thinking of global equity funds, which generally invest in developed markets like the US, Europe, Australia and Canada.
Those are certainly key markets. But the Old Mutual Investment group’s (OMIG) Global Emerging Markets Boutique suggests something new when it comes to offshore markets.
Emerging markets offer and enticing investment opportunity with strong earnings. As a result, this offers interesting and diversified investment growth opportunities to South African investors, said Elize Botha, Managing Director of Old Mutual Unit Trusts and Siboniso Nxumalo, Joint Boutique Head at Old Mutual Global Emerging Markets Boutique, in recent radio interviews with Moneyweb.
Demographics are in emerging markets favour- there is a large young population and good investment, notwithstanding market noise, explained OMIG’s Siboniso Nxumalo. He and his team study the dynamics of fast-growing economies such as China, Russia, India, Brazil, South Korea and Mexico.
Explaining what goes into their selection of stocks for emerging markets, Botha said: “The funds invest in quality companies that are listed on emerging market exchanges or in companies that are listed on developed market exchanges, but which have at least 50 per cent of their assets, revenue or profits originating in emerging market countries.
“We search across the spectrum for companies we believe have exceptional growth opportunity.
Some South Africans are very concerned about potential growth in this country and are looking for diversification both globally and also in emerging markets. The difference between global funds and emerging market funds is that emerging market countries have 74 per cent of earth’s land mass; 81 per cent of its population; and 37 per cent of world GDP.
“Furthermore, the International Monetary Fund (IMF) has said it expects emerging markets to grow two to three times faster than developed markets, and that by 2020 it expects 50 per cent of global GDP to come from these emerging markets.
“So that’s a very exciting story that presents a lot of growth opportunities.”
In contrast, Botha pointed out, developed markets currently have shrinking population demographics, with high equity valuations.
“So emerging markets alongside global markets make for a more compelling offering for clients looking for growth in a period when growth is suppressed,” said Botha.
This fund is not a shortterm investment vehicle. “That is essential to know. With investment in emerging markets there is obviously volatility in the fund.”
She explained that the fund aims to bring growth to any investors’ portfolio that has at least a three- to five-year time horizon.
“For available excess capital in discretionary funds, this is a perfect positioning because it should add beautiful alpha to your portfolio over the medium to long term.
“You can invest in the fund for as little as R500 a month and you can do R10 000. However, because of the volatility associated with emerging markets, this should not be an investor’s core portfolio,” said Botha.
Nxumalo said in his Moneyweb interview: “We find global emerging markets to be some of the most exciting investment opportunities in the world right now.
“What we like about these countries is that they’ve got three things that attract us to them as a collective:
“One, they’ve got favourable demographics. They’ve got very large young populations. That’s one thing we really love about emerging markets, because these young populations are increasingly getting wealthier and are increasingly consuming more and more. They are consuming more cars, they are consuming more products and they are shopping a lot more.
“And at the back of that consumption are companies that we can invest in on behalf of our clients, and our clients can hopefully then grow their wealth through our investments.”
“What excites us about emerging markets is the growth. We’ve got a chart where we show that over the long term emerging markets grow significantly higher than developed markets grow.
“So you get a country like China growing GDP at more than 6 per cent, India at 7 per cent, Indonesia and the Philippines at between 6 and 7 per cent. The important thing about GDP growth is that once GDP is growing it means the underlying economy is growing, the underlying companies are growing and, again, there is increased consumption, there is increased economic activity, there are increased banking transactions.
“We find that in emerging markets there are a lot more opportunities like that, of increased activity in which we can participate and invest, and grow our clients’ funds in a world where growth has become very anaemic,” said Nxumalo.
“The third point about emerging markets is that the valuations are attractive, whether it’s a PE (price-earnings) ratio or a price-to-book ratio – which is the price of the underlying asset – emerging markets are trading at a significant discount to global markets.”
To think on a practical basis, said Nxumalo, “look at the last few Soccer World Cups: in 2006 it was in Germany, but since then it has been in emerging markets. It was South Africa, Brazil, now it’s going to Russia and then Qatar.
“These are all emerging markets and emerging markets are starting to take centre stage. When people talk about China, it is a key driver globally. Over the next 20 years China will become the biggest market in the world and India will become the third biggest market in the world.
“These are markets that need to be noticed, that people need to pay attention to. So that is what we are hoping people will take away from this and actually opt to participate with their funds in this incredible growth opportunity.
Emerging markets have become too large for investors to ignore, even if, like many South Africans, they believe they are already heavily invested in the emerging market of South Africa.
A recent anniversary that badly hit emerging markets and to have gone largely uncelebrated was the 10th anniversary of the 2007 start of the sub-prime crisis. Dave Mohr (Chief Investment Strategist) and Izak Odendaal (Investment Strategist), Old Mutual Multi-Managers, say: “On 9 August, ten years ago, French bank BNP Paribas grabbed headlines by freezing three investment funds after the market for sub-prime securities seized up.
“Although it wasn’t the first sub-prime domino to fall, this was in many ways the point at which the acute phase of the credit crunch started.”
It was the first sign of panic jumping from the American housing market to global financial capitals and forcing a response from the authorities (in the form of a liquidity injection from the European Central Bank).
It would culminate in the collapse of Lehman Brothers and bailout of insurance giant AIG 13 months later, unleashing a global financial tsunami and deep recession.
At a time when investors are worried about North Korea and US President Trump’s ‘fire and fury’ warning, it is worth remembering that the greatest financial crisis since the 1930s had its roots not in a geopolitical conflict, but in the steady build-up of economic imbalances, rising household debt, untested new financial products and a murky ‘shadow’ banking system.
The aftermath of that crisis is still felt today economically, politically and financially. We’ll consider these in turn.
“Economies typically bounce back quickly from recessions, as consumers and businesses respond to low interest rates. However, because of the massive pre-crisis build-up of debt, this traditional mechanism of boosting demand mostly failed.
“Even record low interest rates could not tempt scarred borrowers, who instead focused on reducing debt. Banks have also tightened lending criteria in response to their near-death experience (and regulatory pressure).
“Therefore, while aggressive and innovative action by central banks (including quantitative easing) probably prevented a repeat of the 1930s Great Depression, monetary policy was not enough to lift growth,” says Mohr.
Odendaal adds: “A feature of the post-crisis era has been the widening wealth gap in developed countries, with wage growth stagnating for most workers, while the net worth of the top 1% is flourishing.
“One consequence has been the rise of anger politics and increased political uncertainty in general. Brexit and the election of Donald Trump have been the most high profile manifestations of this trend.
“France’s new President Macron, though very different to Trump and a darling of the markets, also ran as a complete outsider and sidelined France’s traditional parties.
“Another consequence of the lack of wage growth has been continued low interest rates. Central bankers in the US and Europe still largely operate on the assumption that falling unemployment will put upward pressure on wages and ultimately prices.
“The post-crisis era in South Africa has been difficult. The initial rebound from the recession was brisk, aided by generous salary increases for public servants, a quick recovery in commodity prices, and of course the euphoria of hosting the 2010 World Cup. But from 2011 onwards, the economy took blows from all directions.
“Commodity prices slumped as it became clear China would not enjoy double-digit growth forever, the rand collapsed and Eskom was forced to implement load-shedding in 2014 and 2015. The Reserve Bank hiked rates from 2014 onwards.
“A massive drought resulted in a food price shock. Economic growth undershot expectations every year from 2012 onwards, and culminated in a technical recession.
“However, second quarter data from mining and manufacturing - together making up a fifth of the economy - suggests that the technical recession could be over already.
“Of course domestic political uncertainty is elevated, weighing on business and consumer sentiment. While the President survived an eighth motion of no confidence in Parliament, his successor will be elected in December.
“And whoever becomes the new leader of the ANC, and thereafter South Africa, will face a weak economy, with 27% unemployment, and the challenge of stabilising government debt levels and reducing risks in State Owned Enterprises. Fortunately, the global backdrop remains favourable,” says Odendaal.