Now is the time to be very se­lec­tive

Finweek English Edition - - Fundfocus - By Clyde Ros­souw Clyde Ros­souw

In these un­cer­tain eco­nomic times, In­vestec As­set Man­age­ment be­lieves the case for off­shore is strong, par­tic­u­larly when in­vest­ing in busi­nesses that are able to min­imise the risks on tar­iffs, trade wars, and de­clin­ing com­mod­ity prices.

mar­kets are caught in a cross­fire, and it is not the time to take sides. The in­vest­ment en­vi­ron­ment calls for iden­ti­fy­ing best-in-class busi­nesses rather than proac­tively po­si­tion­ing global eq­uity port­fo­lios for one spe­cific mar­ket out­come. Now, more than ever, it is im­por­tant to en­sure that any in­vest­ment in a busi­ness is purely on the ba­sis of strong fun­da­men­tals, and not an at­tempt to lock in po­ten­tial ben­e­fits of spe­cific macro regimes that ap­pear to be fir­ing across mar­kets.

Un­der­stand­ing and mak­ing some sense of what is driv­ing global fi­nan­cial mar­kets, and the re­sul­tant be­hav­iour of dif­fer­ent as­set classes, is be­com­ing a dif­fi­cult task.

The most sig­nif­i­cant change and driv­ing force in fi­nan­cial mar­kets year-to-date has been the with­drawal of liq­uid­ity. Ma­jor cen­tral banks have been shrink­ing their as­sets, and the weaker as­set classes have suf­fered, the most no­table be­ing emerg­ing mar­kets.

How­ever, hang­ing one’s hat on tight­en­ing liq­uid­ity as the ul­ti­mate de­ter­mi­nant of one’s op­por­tu­ni­ties and re­turns, is not enough. There are also nu­mer­ous cross­fires im­pact­ing the way in­di­vid­ual stocks and sec­tors are be­hav­ing. In­vestors need to un­der­stand what these are if they want to come out of 2018 and be­yond with their cap­i­tal and port­fo­lios in­tact.

An is­sue like tar­iffs and pos­si­ble trade wars has been de­vel­op­ing for the last six to nine months, and if you believe there is grow­ing mo­men­tum around coun­tries polic­ing cross-border trade move­ments, it will def­i­nitely pro­duce win­ners and losers on the in­vest­ment front.

At the same time, it has been well-doc­u­mented that gov­ern­ments around the world are ex­pe­ri­enc­ing pop­ulist pres­sure against glob­al­i­sa­tion, be­cause of grow­ing global in­equal­i­ties. The poli­cies that are put in place by gov­ern­ments to re­solve the in­equal­i­ties will either cause fur­ther dis­tor­tions, or im­pact the way that cap­i­tal is al­lo­cated, in the form of higher deficits and/or less pri­vate sec­tor in­vest­ment.

These im­pacts should be seen against the ex­ist­ing trend of liq­uid­ity leav­ing the fi­nan­cial sys­tem. It then be­comes clearer that the eco­nomic cy­cle is start­ing to show some signs of a down­turn.

De­clin­ing com­mod­ity prices is yet an­other stray bul­let fly­ing through the air. Com­mod­ity prices have had a set­back and with liq­uid­ity tight­en­ing there has been a lot of money go­ing into yield-bear­ing strate­gies. In­vest­ment-grade credit, for ex­am­ple, has at­tracted sig­nif­i­cant in­sti­tu­tional pen­sion fund dol­lars, costs are ris­ing and cap­i­tal is no longer as freely avail­able, which is a very clear sign of fi­nan­cial mar­kets tight­en­ing.

How­ever, the out­look is not all neg­a­tive. Con­sider the pos­i­tive dis­in­fla­tion dis­rup­tions com­ing from tech­nol­ogy, which is not show­ing any signs of abat­ing. The wealth ac­cru­ing to large-cap tech­nol­ogy busi­nesses is sig­nif­i­cant. We have seen some very strong earn­ings num­bers from busi­nesses like Google this year as it gar­ners more and more at the mar­gin from advertising dol­lars.

One has to be very aware of how busi­nesses like Google and other tech­nol­ogy busi­nesses will im­pact tra­di­tional busi­ness mod­els, be­cause when you ag­gre­gate their ef­fect across the board they are a very strong dis­in­fla­tion­ary force that is act­ing in the op­po­site di­rec­tion to tar­iffs and pop­ulist poli­cies, which are in­fla­tion­ary.

We con­tinue to believe that the case for off­shore in­vest­ment is stronger than the case for in­vest­ing within South­ern Africa.

As a gen­eral rule, we con­tinue to believe that the case for off­shore in­vest­ment is stronger than the case for in­vest­ing within South­ern Africa, par­tic­u­larly if you believe there is po­ten­tially fur­ther cur­rency weak­ness to come.

How­ever, it is not all about own­ing global tech­nol­ogy shares in high-growth ju­ris­dic­tions as part of one’s off­shore al­lo­ca­tion. Be­cause if one looks, for ex­am­ple, at Ten­cent, it has been a poor per­former so far this year, par­tic­u­larly from May on­wards.

In sim­ple terms, we think the case for off­shore is strong, par­tic­u­larly when in­vest­ing in busi­nesses that are able to min­imise the risks on tar­iffs, trade wars, and de­clin­ing com­mod­ity prices.

The off­shore in­vest­ment en­vi­ron­ment is very wide and com­plex; we have sim­pli­fied our off­shore in­vest­ment strat­egy by in­vest­ing in a hand­ful of busi­nesses that make fun­da­men­tal sense and have the abil­ity to com­pound, be­cause their in­her­ent growth rate is strong; are masters of their own des­tiny; and that are less eco­nom­i­cally sen­si­tive.

While there are still enough in­vest­ment op­por­tu­ni­ties, we are at that stage of the cy­cle where the risks are ris­ing, so in­vestors have to be ex­tremely se­lec­tive and iden­tify best-in­class busi­nesses, be­cause the ag­gre­gate con­di­tions are not con­ducive to in­vest­ing across the board. ■

is a port­fo­lio man­ager at In­vestec As­set Man­age­ment.

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