TRADE OF THE MONTH

In­vestors who want to go off­shore have a dif­fi­cult choice be­tween re­gions

Financial Mail - Investors Monthly - - Contents - Stafford Thomas

Atough call awaits in­vestors who be­lieve it is not too late to put money into off­shore eq­uity. A cru­cial part of their call will be to choose be­tween the US, Euro­pean and UK mar­kets.

It is a call even the in­vest­ment pro­fes­sion­als are not en­tirely cer­tain about mak­ing. “There is no easy an­swer,” says Douw Steenkamp, global port­fo­lio man­ager at Denker Cap­i­tal, a San­lam af­fil­i­ate.

With the ben­e­fit of hind­sight there is no doubt about which mar­ket has been the best call so far.

Deutsche Bank’s DBX Tracker MSCI USA ex­change traded fund (ETF), which tracks the MSCI US big-cap share in­dex, trounced the de­vel­oped mar­ket op­po­si­tion over ev­ery pe­riod from one to seven years. Over five years to the end of April, as­sisted by a strength­en­ing US dol­lar and slid­ing rand, the fund achieved a blis­ter­ing av­er­age an­nual re­turn of 27.72%. So R1,000 in­vested at the start of the pe­riod was worth R2,400 at the end.

The US tracker fund’s near­est ri­val in the Deutsche Bank ETF fold, the DBX Tracker MSCI UK FTSE 100 in­dex fund, was far be­hind with an av­er­age an­nual re­turn of 16.74%.

Trail­ing the pack, the DBX Tracker MSCI Eurostoxx 50 de­liv­ered an av­er­age an­nual re­turn of 12.5%. The Eurostoxx 50 in­dex is com­posed of the 50 big­gest listed com­pa­nies in 12 eu­ro­zone coun­tries.

Among de­vel­oped eq­uity mar­kets, the US re­mains the firm favourite among ETF in­vestors, ac­cord­ing to data for April from Black­Rock.

Spurred on by un­ex­pect­edly dovish state­ments on US in­ter­est rate pol­icy by Fed­eral Re­serve gover­nor Janet Yellen, $11.55bn poured into US ETFs.

By con­trast, ETF in­vestors re­deemed a record $6.3bn out of Euro­pean eq­uity ETFs.

“Euro­pean eq­uity out­flows were driven by do­mes­tic and for­eign in­vestors, with volatil­ity in the euro and tight­en­ing fi­nan­cial con­di­tions weigh­ing on sen­ti­ment,” noted Ur­sula Mar­chioni, chief strate­gist, iShares EMEA at Black­Rock, in a state­ment.

She said that while Euro­pean stocks look at­trac­tive be­cause of eco­nomic poli­cies fo­cused on stim­u­lat­ing pri­vate con­sump­tion, there are geopo­lit­i­cal risks.

Most prom­i­nent among th­ese risks is Brexit, an ab­bre­vi­a­tion of the UK’s po­ten­tial exit from the Euro­pean Union (EU). The world will know af­ter UK vot­ers take part in a ref­er­en­dum to be held on June 23 this year.

Steenkamp be­lieves the chances of the ref­er­en­dum go­ing the way of those calling for an exit are rel­a­tively low. But if it did go that way, there would be “tur­moil” in mar­kets, he says.

The grav­ity of the sit­u­a­tion was spelt out by Bri­tish prime min­is­ter David Cameron, who has warned that if the UK were to vote to leave the EU it would put peace in Europe at risk.

In mid-May, 58.6% of pun­ters plac­ing bets with UK book­mak­ers were wa­ger­ing that the UK would stay in the EU and 41.4% were bet­ting it would leave.

Po­lit­i­cal un­cer­tainty also reigns in the EU’s third-largest econ­omy, Spain, where a gen­eral elec­tion in De­cem­ber last year failed to pro­duce a gov­ern­ment. Span­ish vot­ers go back to the polls on June 26. UK news­pa­per The Guardian com­ments: “If the polls are to be be­lieved, the June elec­tion will de­liver a sim­i­lar re­sult to De­cem­ber’s.”

And while Mar­chioni’s view is that Euro­pean eq­uity looks at­trac­tive, there are dif­fer­ent opin­ions. Ac­cord­ing to Swiss bank UBS, the con­sen­sus 2016 earn­ings growth fore­cast for EU com­pa­nies stood at 0.5% at the end of March, the low­est level since the first quar­ter of 2009.

“In­vestors got ov­er­en­thu­si­as­tic about EU eq­uity,” says Philip Saun­ders, co-head of In­vestec As­set Man­age­ment’s multi-as­set team in Lon­don. “The US has bet­ter earn­ings growth dy­nam­ics. We are over­weight US stocks.”

Steenkamp agrees. “There are some very good com­pa­nies in Europe but US com­pa­nies tend to be more proac­tive and re­act faster to change,” he says.

“In the long term, US com­pa­nies tend to out­per­form their for­eign peers.”

But US com­pa­nies are hardly pro­duc­ing im­pres­sive re­sults right now. Ac­cord­ing to US re­search firm Fac­tSet, over­all year-on-year earn­ings in the first quar­ter of 2016 were down 7.1%.

It was the largest de­cline since the third quar­ter of 2009, when earn­ings fell 15.7%. Also of con­cern, the earn­ings de­cline in the first quar­ter of 2016 marked the first four con­sec­u­tive quar­ters of year-on-year earn­ings de­clines since 2008/2009.

There is a bright spot, though. Fac­tSet re­ports that an­a­lysts ex­pect US cor­po­rate earn­ings growth to re­sume in the third quar­ter of 2016.

The sit­u­a­tion in the US and Europe in­clud­ing the UK makes it dif­fi­cult to pick a re­gion. How­ever, for in­vestors who are de­ter­mined to head off­shore, on bal­ance it would ap­pear ad­vis­able to fol­low the money and opt for the likes of the DBX Tracker MSCI USA ETF.

Pic­ture: REUTERS

UK prime min­is­ter David Cameron has warned that leav­ing the EU would put peace in Europe at risk.

Source: IRESS

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