In­ter­est­ing times? Oh yes

But global in­vestors are sur­pris­ingly san­guine, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Feature: Global Investing -

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

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