Lots of off­shore op­por­tu­ni­ties

Finweek English Edition - - Creating Wealth - But where do you go?

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?

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