In­vest­ing in volatile times

Po­lit­i­cal un­cer­tainty has be­come a global phe­nom­e­non. What can in­vestors do to counter the global geopo­lit­i­cal risk?

Finweek English Edition - - FUND FOCUS -

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%).

As­set classes

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.”

Don­ald Trump

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.