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