Lots of offshore opportunities
THE SOPHISTICATED investors who read this column know that a well-diversified portfolio should include some offshore exposure. The question is where?
One answer might be to have offshore exposure everywhere, suitably weighted according to your view. I’m not too sure. Firstly, that could be very expensive. More financially moderate investors might have to prune the foreign countries they invest in.
Also, being invested everywhere around the world could be counterproductive. At any point over the past year more foreign markets were probably going down than those going up. That equals a very mediocre, maybe not even positive, return. Finally, right now there are too many basket cases around the world (and I don’t mean in the developing countries) to risk spreading your money too widely.
So where do you go? A few of the talented investment professionals at Coronation Fund Managers helped me work out my answer at a presentation last week. Their arguments were compelling, though I didn’t agree with everything they said.
I’ve broken my answer down into developed versus emerging markets (Coronation might not agree with this either, as they have funds that combine both). For the sake of argument, though, if the choice were one or the other where would you go?
Senior portfolio manager and one of Coronation’s founder members, Louis Stassen, presents the case of mainly, but not exclusively, developed markets. Generally they have been battered but he believes this now presents opportunities.
“If people use last year’s experience (a severe experience) not to invest in equities, to go offshore, they are throwing the baby out with the bath water.”
Well yes, but maybe that’s one particular baby we need to get rid of anyway ( just joking). Stassen says that while he expects the road to be long in terms of economic recovery in developed markets, this tough time going forward has already been discounted in the price of shares.
I’m sure he’s right, but my nagging concern is that the past year or so has been so abnormal, has it not perhaps changed the whole nature of investing in these markets, and in the make-up of a number of shares as well? For instance, there are now a number of US equities that are pumped up by government debt, some to the point where they are effectively nationalised companies. These shares might be cheap but what are you buying, the company or US government debt? It’s the same for some shares in the UK, made worse by a prime minister who went off the rails a while ago, trying to lead a bankrupt country with a disintegrating cabinet. At some stage financial markets in these countries will return to normal but I think it might take a very long time. So I wouldn’t rush in now.
I asked Stassen about this and he replied, no doubt correctly, that lots of these markets had been sold off aggressively in the face of the slowdown. But even though there will be a slowdown, it’s not to the extent these markets have been sold off.
I’ll leave readers to decide on that one.
More assuring for me was the argument presented by Kirshni Totaram, Coronation’s head of institutional business, for emerging market (EM) economies. She noted a number of opportunities, for example that household debt as a percentage of GDP was very low compared to developed economies, and that this was “a nice growth story”.
There are also significant growth opportunities in terms of Internet penetration and beverage consumption, particularly beer and Coca-Cola, she said.
Closer to home, portfolio manager Peter Leger runs two Africa funds. Africa has always been a contradiction, full of hope one day and pessimism the next. As Leger says: “Africa seems to have everything going for it but it only contributes 2% to global GDP. So it’s written off as an investment.”
But he makes a telling point I never picked up before. In the previous commodities run many African countries were doing well and piled into debt. For instance, debt in Nigeria peaked at 130% of GDP in the previous commodities run, he says. Now, however, it’s only 3% in the present run.
Leger puts this down to Africa learning from mistakes of the past, which makes future investment in the continent look much better.
Probably related to this is that foreign investment in Africa has increased. “It’s not the usual Western countries we see investing, but places like China, Russia and South American countries.” (See article on p52.)
He adds that there’s more democratic stability than Africa has ever experienced before and various developments like mobile phones that accelerate growth.
As a third-generation African I probably have a subconsciously positive bias towards the continent. That’s not ideal when making investment decisions, but this time around the growth and investment story does look good.
My only little concern is, what do we do about Bafana-Bafana before the Soccer World Cup?