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.