Interesting times? Oh yes
But global investors are surprisingly sanguine, writes Johann Barnard
The JSE hit a new high at the end of July, as did the Dow Jones in the US. These highwater marks are in contrast to a local economy technically in recession and under threat of further ratings agency downgrades. They feed into the US stock market bull run, now in its ninth year.
What are investors to make of this when considering their asset allocations and portfolio structuring?
Conventional wisdom dictates that some correction should be expected. But markets, politics and sentiment seem to be running counter to all we would normally expect.
“If you look at various different measures of market sentiment that track how afraid or risk-averse investors are, those actually show that investors globally are feeling quite complacent,” says Tamryn Lamb of Allan Gray Orbis.
“There have been recently heightened levels of political uncertainty, but there are interesting dynamics happening on the global stage. What is more interesting to me than just living in interesting times is that that uncertainty is not reflected in the investment market, either equity or debt.
“On their own, political and economic uncertainty don’t have to be bad because [they] can often create a situation in which investors become nervous about a particular asset and move into other assets. This leads people to stop focusing on fundamentals, and often that could be an opportunity for managers such as ourselves who are focused on the underlying, bottom-up assessment of what a business is worth.”
This trust of proven strategies and assessment of the fundamental value of a stock is a recurring theme when speaking to fund managers about the value, and risks, of offshore investing.
One of the dangers is that the choice of assets is so vast, especially in comparison with the local markets, that individual investors are unlikely to be able to fully grasp the threats or value of the many options available to them.
Bradley Mitchell, co-fund manager of the Sasfin Global Equity Fund, says the main advantages managers have over individual investors are the time and market expertise they have to identify the bestquality companies from the vast range of opportunities available internationally.
“We believe the intrinsic value quality companies typically create over time will ulti- mately reflect in an appreciating share price. So we spend a significant amount of time researching all aspects of each business being considered, to determine if [it offers] value; especially at a time when global markets, particularly US markets, are at record highs.
“It is important to note that, with nearly 60% of the S&P 500 companies having reported for the second quarter (by early August), the vast majority were reporting results in excess of expectations. High market levels are therefore for now being supported by better-than-expected earnings and sales growth.”
The challenge for SA investors who may wish to invest offshore to protect their wealth against a further deterioration of local conditions is that equities remain the preferred asset class. The reason is that returns from international bonds and cash continue to be significantly below SA’s inflation of 5.1%.
This is a crucial consideration for local investors in retirement who depend on their returns for income.
Pieter Koekemoer, head of personal investments at Coronation Fund Managers, says some of the caution around global equities, as well as the strong rand eating into returns, can be seen in neutral flows into rand-denominated international funds.
“Investors are stepping back from taking more money offshore, as often happens when the short-term returns have been a little disappointing,” he says. “In the local unit-trust industry portfolios we’ve seen a similar shift from low-risk balanced funds to income funds, because in the SA context the fairly anaemic returns from the local equity markets were trumped by the yielding asset classes.”
He points out that the SAlisted property index, for instance, has delivered returns over the past three years of about 14%, and bonds and cash have yielded close to 7.5%, compared with equity market returns of only about 5%.
Koekemoer, contrary to pessimism about local markets, believes investors who are giving up on their growth asset exposure are making a mistake, as valuation levels in the local equity markets have priced in a lot of bad news and are the most attractive they’ve been for the past five years.
“We do expect somewhat better outcomes for the local equity market over the next few years,” he says.
As to the possibility of a major global market correction, he points to the CBOE Volatility Index hitting its lowest level yet, reflecting benign current investor sentiment. The index is a key measure of market expectations of near-term volatility in the S&P 500 stock index. Its current level indicates that global investors are much more sanguine than local investors.
Pieter Koekemoer ... neutral flows
Bradley Mitchell ... time and expertise