Investing in volatile times
Political uncertainty has become a global phenomenon. What can investors do to counter the global geopolitical risk?
over the past several decades we’ve become used to political uncertainty in South Africa. What has changed is that this is no longer an exclusively domestic or emerging-market phenomenon. It has become a global trend, and a feeling of concern about heightened global geopolitical risk is anything but misplaced.
This is the view of Karl Leinberger, chief investment officer at Coronation Fund Managers.
For example, last year, he points out, markets were surprised by both Brexit and US President Donald Trump’s election victory. “While the market is now prepared for further surprises in Europe (ahead of elections in Germany, France, the Netherlands and Italy), we believe the biggest potential source of a black swan remains China, which is currently not a focus of news flow. In SA, the governing ANC’s elective conference later this year also promises to be a defining event in the country’s history.
“Against this backdrop, it is unwise to have large one-directional positions depending on drivers such as the currency, interest rates and commodity prices, which could blow portfolios apart if your view is proven to be incorrect. This is a time for building anti-fragile funds that can thrive over the longer term regardless of the outcome of unforecastable events,” Leinberger says.
He notes that for virtually every client with whom he interacted in 2016, the likelihood of an SA downgrade and possible consequences for their portfolios was high on the agenda.
“The ratings downgrade has largely been priced into the market, but it remains significant if only for its symbolic value,” Leinberger says.
“A potential downgrade is but a symptom of the fundamental issues affecting our society, such as deficient primary and secondary education; the imploding tertiary education sector; major declines in the national productivity ethic; rampant corruption, collapsing service delivery and increased inequality.”
According to Leinberger these are the issues that need to be discussed at business conferences and dinner parties, not what Standard & Poor’s will decide at its next ratings meeting.
Leinberger believes that we’re likely to remain in a low-return environment for some time. But if you have the ability to be patient, good long-term opportunities remain for those judiciously seeking to buy low and sell high.
Coronation’s forecasts of annualised returns for the next 10 years are: SA equity 8% to 12% (11.4% in the previous 10 years); global equity 8% to 12% (9.3%); SA property 9% to 12% (15.8%); SA bonds 8% to 9% (8%); global bonds 4% to 5% (10.2%); cash 7% to 8% (7.5%); and inflation 6% to 7% (6.2%).
LEINBERGER ON SELECT ASSET CLASSES: SA equities: “Currently offering decent value. We first forecast lower future returns in late 2011, but were two years too early. We’re now well into the low-return environment – the JSE has done nothing in real terms for four years after five strong years post the global financial crisis. The likelihood of better future returns has now increased. In June 2015 we were very conservatively positioned in our Balanced Plus Fund with a maximum equity exposure of 55%, the lowest ever. We’re currently at 66%.” Global equities: “Clearly not cheap at current levels. Current ratings are marginally above long-term averages, and the earnings base is also above longterm averages, but not prohibitively so. We think that global equities at an annualised 5% to 6% in US dollar terms, while below the long run average of 9%, are much better than the alternatives.” Emerging markets: “Attractive proposition. The base is not high, and although they had a strong 2016 (+12%), they are still 30% below the peak. We still find many quality companies with great management teams and good prospects trading at attractive levels.” President of the US SA fixed rate bonds: “We have some exposure, but on a limited scale. We have concerns about both a potential global bond bubble, and in SA whether fiscal discipline will last. Our Balanced Plus Fund is 13% exposed to bonds, the majority of which are in floating rate and inflation-linked instruments.” SA listed property: “We prefer quality listed property stocks to bonds. This view has already added value in our portfolios, but we are not at the point that we wish to change our position significantly. We still think that listed property will outperform bonds, even if bonds have an average 9% yield to maturity. Listed property distribution growth should be around 5% annually over the next few years, with initial yields of 8% to 9%.” UK property stocks: “Markets hate uncertainty, and given the Brexit issue, prices are understandably cheap. However, we like counters such as Intu, which is a unique portfolio of prime shopping centres; it’s London light (only 20% of its portfolio); and the retail property market is less likely to be impacted than office and residential. Besides, it’s trading on a 4.7% dividend yield and 32% discount to NAV [net asset value]. From these levels, patient investors should be well rewarded in due course.”
“From these levels, patient investors should be well rewarded in due course.”