Emerg­ing-mar­ket storm

Finweek English Edition - - GLOBAL OUTLOOK -

There is no ques­tion that the re­cent weeks have evoked a new risk el­e­ment into the global in­vest­ment pic­ture, par­tic­u­larly for emerg­ing mar­kets. This view was ex­pressed by Stan­lib di­rec­tor of re­tail in­vest­ing, Paul Hansen, in an in­ter­view with Leon Kok. He is one of the coun­try’s most ex­pe­ri­enced fund man­agers and a highly re­garded mar­ket watcher.

“There is no ques­tion that we have been caught up in a storm, pre­cip­i­tated in part by dis­ap­point­ing man­u­fac­tur­ing f ig­ures out of China and in­volv­ing es­pe­cially In­dia, In­done­sia, Turkey, Brazil and South Africa (the so-called ‘frag­ile five’, be­cause of their high cur­rent ac­count and budget deficits). The lat­ter were hit by the cur­rency traders around the world who spotted the soft spots. They piled in, short­ing these var­i­ous cur­ren­cies,” he says.

“Ar­gentina de­val­ued by 15% and the Brazil­ian, Turk­ish and South African cur­ren­cies all took a big knock, pre­cip­i­tat­ing a f lare-up in im­ported in­fla­tion and caus­ing cen­tral banks to raise in­ter­est rates. Turkey raised its bank rate from 4.5% to 10% in a sin­gle day; Brazil raised its rate for the fifth or sixth time in a year; and In­dia and South Africa raised theirs marginally.”

The South African Re­serve Bank found it­self in a ma­jor quandary, Hansen points out. On the one hand it had hoped not to raise in­ter­est rates be­cause of the frag­ile state of the econ­omy, and on the other in­fla­tion is now fore­cast to over­shoot the 3%-6% band thresh­old. Con­se­quently, the Re­serve Bank raised rates by a neu­tral 50 ba­sis points, but could be tempted to do so again in the next few weeks. The sit­u­a­tion has been fur­ther ag­gra­vated by the net sell­ing of South African bonds to the tune of R25bn by for­eign in­vestors this year, com­pared with a net in­flow of R21bn last year, he ex­plains.

Like­wise, there has been net sell­ing of R5bn in eq­ui­ties by for­eign­ers, who now own 35% of the mar­ket com­pared with al­most zero own­er­ship in the Nineties. Given SA’s crit­i­cal twin deficits, Hansen be­lieves the down­ward trend in the in­ter­na­tional value of the rand may still be in­tact. Cer­tainly on the charts, the down­trend since April 2011 re­mains in­tact (from R6.60 to the dol­lar). He points to one of Lon­don’s leading cur­rency an­a­lysts, who re­cently noted that there has been a par­tic­u­larly close cor­re­la­tion be­tween the Turk­ish lira and the rand – they have been track­ing each other very closely in re­cent months.

“He [the an­a­lyst] said: ‘You’ve got ba­sic struc­tural prob­lems, you have un­rest in the min­ing sec­tor and you have an elec­tion com­ing up soon, but don’t un­der­es­ti­mate the ex­tent to which in­ter­na­tional is­sues could con­tinue to weigh down on you.” OP­POR­TU­NITES IN THE OFF­ING Hansen be­lieves that the 5% plus re­trac­tion in in­ter­na­tional and do­mes­tic eq­uity mar­kets in re­cent weeks has cre­ated con­sid­er­able op­por­tu­nity for lo­cal in­vestors.

His pref­er­ence, how­ever, is for in­ter­na­tional shares.

He says that two funds wor­thy of con­sid­er­a­tion in the Stan­lib suite are its Global Eq­uity Fund and its Euro­pean Fund. In fact, in re­cent weeks he has per­son­ally in­creased his own ex­po­sure to both funds.

The for­mer is man­aged by Lon­don­based Thread­nee­dle and the lat­ter by Bos­ton-based Fidelity. How­ever, man­age­ment of the Euro­pean Fund is to switch to Thread­nee­dle as well.

Hansen says that Thread­nee­dle is con- fi­dent that best in­vest­ment prospects go­ing for­ward lie with the US, which cur­rently con­sti­tutes 55% of its global port­fo­lio on a ge­o­graph­i­cal ba­sis. It’s also over­weight Ja­pan at 13% of the port­fo­lio against a bench­mark of around 9%. How­ever, it’s un­der­weight Europe, which makes up about 12% of the port­fo­lio.

The Global Eq­uity Fund boasted a 55% growth in rand terms and 27% in­crease in US dol­lar terms dur­ing the past year, and sig­nif­i­cantly out­per­formed its bench­mark. But some of the gain em­anated from de­te­ri­o­ra­tion of the rand’s value. In spite of the ac­com­pa­ny­ing re­port, Hansen main­tains that emerg­ing mar­kets could still sur­prise on the upside. “Min­ing shares, for in­stance, are the wild cards and could be­come very in­ter­est­ing as the world econ­omy picks up.” In fact, the JSE Min­ing In­dex is up 16.6% in rand terms so far in 2014 (by 18 Fe­bru­ary), which equates to 9.9% in dol­lar terms.

An­other in­trigu­ing de­vel­op­ment is that with Thread­nee­dle’s tra­di­tion­ally ex­cel­lent record in man­ag­ing its South East Asian man­dates, Stan­lib has de­cided to merge its South East Asia Fund into its Global Emerg­ing Mar­ket Fund. This should give the lat­ter a boost.

“Thread­nee­dle isn’t a huge out­fit, but is very com­pre­hen­sive in its in­vest­ment pro­cesses,” says Hansen. “It has an ex­cel­lent track record, an amaz­ing ar­ray of in­vest­ment ex­per­tise around the world, and they feed back into the sys­tem daily. It also has a huge Amer­i­can as­so­ciate, which helps con­sid­er­ably.”

Turn­ing to the Euro­pean Fund, which in­cludes the UK, Hansen says he still likes Europe and is con­fi­dent that Thread­nee­dle will add ex­tra im­pe­tus to per­for­mance. “Ger­many’s record is im­pres­sive and we’re even see­ing pe­riph­eries such as Spain and Greece show­ing con­sid­er­able im­prove­ment, al­beit off a low base.”

The fund gen­er­ated a 47% re­turn in rand terms dur­ing the past year and is 23% up in dol­lar terms.

Paul Hansen

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