Global markets look attractive
From a risk point of view it makes sense to diversify
SOUTH AFRICAN retail investors have turned bullish on the outlook for offshore funds and all indications are that they will again benefit handsomely on the back of last year’s gains.
Welcoming the stepped-up retail interest in investing offshore, Association of Collective Investments CE Di Turpin says investors may be taking the view that offshore markets offer higher growth opportunities after three years of exceptional growth from the JSE.
“They could also be taking a view on the rand – that it may weaken in the months ahead given the trade deficit – and that now is an ideal time to invest offshore. Market analysts, however, seem divided on whether the currency will weaken or strengthen this year.
“Of course, from a market-risk point of view, it makes sense for investors to diversify offshore, gaining access to a spread of markets and sectors, aside from any short-term local market or currency considerations.”
The inflows into unit trusts for 2006 at R6,9bn were the second-best in the eightyear history of foreign-registered funds in SA. Only the inflows in 2000 of R8,5bn beat this at a time when there was huge interest in investing offshore.
Last year was undoubtedly a bumper year for global markets and the JSE. The FTSE World Index gained 20% in US dollar terms against a background of strong liquidity, robust corporate earnings and a wave of merger and acquisition activity. The gains came in spite of uncertainty about US interest rates, higher oil prices and a mid-year scare over inflation and growth, which sparked a brief but hefty correction in stock prices.
Looking at the various indices, the Dow Jones Industrial Average was up 16,6% for 2006 after recording several highs in recent months, the S&P 500 rose 14%, and the Nasdaq Composite was up 9,9%. In Europe, the FTSE 300 rose 16,3%, with Spain having been the brightest star – the Madrid SE Index rose 35,1% in local currency terms and 51,6% in US dollar terms. In Japan, the Nikkei 225 Average managed only a modest 6,9%.
The Hang Seng index in Hong Kong jumped 34%, while Sydney and Taipei both gained more than 20%. Russia was also up with the top global gainers, rising nearly 60%, while Brazil’s Bovesta climbed 32,9% and India’s Sensex 46,7%.
Indications are that 2007 will be another good year. The World Bank believes developed economies will grow at around 2,4% this year and developing economies at 6,4%. UBS, JP Morgan Chase and Credit Suisse Group predict, meanwhile, that the MSCI emerging markets stock market index will climb as much as 15%.
Markets on the high side include the US, Japan, Spain, Russia, China, India, Indonesia, Malaysia, Colombia and SA.
Fairly priced, however, are the UK, Germany, France, South Korea, Hong Kong, Singapore, Taiwan, Thailand and Brazil.
Looking at select country or regional situations, corporate profits growth in the US may slow marginally, but it’s unlikely that markets will plummet. Britain will probably chug along at about 2,5% real economic growth and London will continue to benefit handsomely from world financial markets. Much of Europe may well continue to outperform, with Eurozone economies generally growing significantly in the face of change. Russia is on a roll and is likely to remain that way. Japan is on the mend after 16 years of recession, but don’t expect fireworks.
The downside, as Fortune magazine has pointed out, is that historically there are strong correlations between housing crashes and recessions, between oil shocks and recessions, and between inverted yield curves and recessions. But that’s no reason to back off. At worst, you can probably bet on repeats of seasonal corrections as experienced in previous years.