4-WEEK ROLLING RE­TURNS REL­A­TIVE TO BM MSCI EMM 28.03.14 TO 10.02.17

Finweek English Edition - - FUND FOCUS -

prices sup­port­ing emerg­ing­mar­ket out­per­for­mance.

Among the big­gest myths re­quir­ing de­bunk­ing is that both de­vel­oped mar­kets and the JSE All Share In­dex (Alsi) cur­rently of­fer value, Basa ar­gues. “On the con­trary, they’re look­ing ex­pen­sive and you’re pay­ing a high price for low growth. The price-to-earn­ings ra­tio (P/E) of the US S&P 500 Composite has just shot through 28.33 com­pared with a 16.70 longterm av­er­age, 16.4 for SA, and 14 for emerg­ing mar­kets gen­er­ally.”

While con­ced­ing that emerg­ing mar­kets are not nec­es­sar­ily cor­re­lated to de­vel­oped mar­kets, Basa points out that South African unit trusts have be­come closely cor­re­lated to the US, Ja­pan and Europe. Much of this has had to do with the 67% ex­po­sure of large listed South African com­pa­nies linked to de­vel­oped mar­kets. That cre­ates its own risks. Basa says sev­eral emerg­ing mar­kets, though not ex­clu­sively, are filled with po­lit­i­cal noise and a con­stant stream of drama that of­ten gives both fund man­agers and clients some­thing to worry about.

“Over the past few years Brazil’s pres­i­dent has been im­peached; South Korea’s pres­i­dent is un­der­go­ing the same; the Turk­ish pres­i­dent is seek­ing au­thor­i­tar­ian pow­ers af­ter the failed coup at­tempt; and SA’s govern­ment has been at war with it­self for some years,” he says.

“The flip side is that emerg­ing-mar­ket GDP growth is out­per­form­ing de­vel­oped mar­kets; their fac­tors of pro­duc­tion out­weigh the rest of the world (74% world land mass, 81% world pop­u­la­tion, 37% of world GDP, and 31% of world mar­ket cap­i­tal­i­sa­tion); and they boast far more favourable de­mo­graph­ics. These in­clude young pop­u­la­tions set to be fu­ture con­sumers rel­a­tive to the pre­dom­i­nantly ag­ing pop­u­la­tions of de­vel­oped coun­tries in­creas­ingly be­com­ing a bur­den to the state.”

Another ma­jor crit­i­cism of emerg­ing mar­kets, Basa points out, is in­fe­rior cor­po­rate gov­er­nance. “That’s partly true, but con­sider also that you have a choice of over 1 000 listed com­pa­nies, and cer­tainly in our process we have a very ro­bust in­ter­nal cor­po­rate gov­er­nance frame­work that en­ables us to sift out trou­bled and weaker com­pa­nies.

“Also help­ful is that be­ing South African, we’re steeped in the chal­lenges of an emerg­ing-mar­ket en­vi­ron­ment and are able to dif­fer­en­ti­ate the good from the bad. Be­sides, our team spends con­sid­er­able time ‘kick­ing tyres’, vis­it­ing and analysing com­pa­nies on site. If they score be­low cer­tain lev­els, we don’t in­vest in them at all.”

He says that ul­ti­mately, though, his team’s task is not to spec­u­late on the eco­nom­ics of murky world pol­i­tics. “We are bot­tom-up fun­da­men­tal in­vestors and hence our ex­per­tise is in the de­tailed anal­y­sis and un­der­stand­ing of spe­cific com­pa­nies.”

For in­stance, dur­ing the first quar­ter of this year the team mem­bers would have vis­ited Mex­ico, Colom­bia, Tai­wan, South Korea, USA, In­dia and Turkey meet­ing with com­pany man­age­ment teams, in­dus­try reg­u­la­tors and po­lit­i­cal ex­perts.

“Over a long-term view of five to 10 years, val­u­a­tions and the cycli­cal na­ture of in­vest­ments sug­gest emerg­ing mar­kets should work out well. In­vest­ing in them now makes good sense,” Basa con­cludes.

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