Has there been great rotation?
There are signs we are experiencing a small but growing switch in capital allocation from developed into emerging markets.
The Black River area of Mauritius, in and around Tamarina, offers swimming-with-dolphin-cruises. There’s no guarantee you’ll see or swim with the dolphins. Even when relaxed, the school’s movements are difficult to predict.
This got me thinking about stock markets and the massive global flows of money – sometimes just as difficult to forecast.
Get it right and you strike gold. Get it wrong and you see someone else in the distance swimming with the dolphins.
The great rotation
Perhaps we’ve been experiencing a change in global capital’s flow and direction: “a great rotation” as the greybeards call it.
Such sudden changes don’t come with bells ringing. Rather, much like a school of dolphins, it just happens. You only pinpoint the great turning point much later.
For some weeks now there’ve been signs that we may be experiencing such a great rotation: a small, growing switch in capital allocation from developed markets back into emerging markets, of which SA is one.
Over the last five years or so it’s been a developed market story for equity markets. Developed markets have massively outperformed emerging markets.
Over the last couple of months there seems to have been a stalling in the flow of momentum-driven capital into developed markets and a sea-change in the approach to emerging and even frontier markets.
It also explains, to a certain extent, the sudden upward lift in our market, after nearly three years of sideways movement.
SA hasn’t suddenly become the darling of the investment world: capital’s flowing into the country despite the poor economic outlook. Index trackers have to allocate capital to SA, which remains a key constituent of the MSCI Global Emerging Markets Index, but they’ve done so reluctantly. Although it’s looked much perkier in recent weeks, the SA market’s lagging the MSCI Emerging Market Index substantially. This underperformance seems to have started soon after December 2015’s Nenegate saga.
SA investors wanting exposure to emerging markets excluding SA have limited choice. One of few locally-managed funds providing such exposure is the Coronation Flexible Emerging Markets Fund. It’s available on all local platforms and has outperformed the SA market and its benchmark by a substantial margin.
It provides local investors with a managed exposure to emerging markets which might offer better growth opportunities than SA does. Fund manager Gavin Joubert is particularly optimistic about the retail sector in Russia (cheaper than in SA), education in Brazil and banking in India. It might be time for local investors to start brushing up on their knowledge of emerging market funds and indices.
It’s not always a binary story in investment markets, SA or the US/developed markets, as some investors seem to think. Other parts of the world are starting to show some exciting early-mover developments. Frontier markets are also starting to attract some flows from expensive developed markets.
Magnus Heystek is investment strategist at Brenthurst Wealth.