Investing beyond our borders in the current global economy
It is time we stopped thinking it is normal for the local equity market to outperform the offshore market, Karl Leinberger, Coronation’s chief investment officer, says.
He says we tend to make decisions based on what we have experienced recently. This is known as anchoring.
We are currently anchoring on the extraordinary returns that local equities ear ned during the five years from 2003 to 2008, he says.
In doing so, we fail to acknowledge that there have been many periods over almost the past 70 years when local equities have not produced the best returns.
A look at returns on a rolling five-year basis since 1940 shows that, over many periods, foreign equities as measured by various indices have, in fact, produced better returns than the local market.
Leinberger says most investors have eight to 14 percent of their portfolios invested in offshore markets. Long-term studies, however, indicate that we should have an offshore exposure of 20 to 30 percent.
He says that when you see great value, you should be at the top end of the range.
BEST VALUE IN 20 YEARS
Coronation believes global equities are currently reasonably priced and are offering their best value since the late 1980s.
Leinberger says that despite uncertainty about the shape of the global market recovery and whether there will be pull-backs from the recent rally, Coronation sees more value in global equities than in the local market. The firm is especially focused on emerging markets and the shares of multinational companies with proven competitive brands and franchises.
Coronation’s view is that multinational companies have sustainable earnings and have largely been forgotten in the recent rally.
The current strength of the rand against other currencies is a good reason to invest offshore if you are underweight in equities. Leinberger says you shouldn’t wait until it weakens again before you do so.
Plexus Group chairman Prieur du Plessis says that if you want to diversify into foreign equities, you should do it when there is a pullback in the global market. But you should not bank on a big pull-back now, because there is a lot of cash on the sidelines waiting to enter the equity markets and boost prices.
EMERGING MARKET EXPOSURE
With managers looking to emerging markets for future returns, you may also want to think about your emerging market to developed market asset allocation.
Emerging markets are those in countries experiencing rapid growth and industrialisation. There is no definitive list, and indices that track these markets have their own defining criteria.
Prudential Unit Trusts managing director John Kinsley told a recent Association of Savings & Investment South Africa financial planner forum that asset managers and advisers have always argued that, because South Africa is an emerging market, you should diversify your portfolio by investing beyond our borders into developed markets, such as the United States and Europe.
However, in recent years emerging markets have outperfor med developed markets (see graph for 2009). South Africa has lagged behind some leading emerging markets, such as India and China.
Kinsley says it may be time to rethink the belief that local investors should diversify into only developed markets.
Arthur Kamp, an investment economist at Sanlam Investment Managers (SIM), says SIM believes that emerging markets will continue to perform well and will boost the performance of the global economy otherwise dampened by a lack of consumer spending.
He says emerging markets already comprise a third of the world economy.
“Even if emerging markets do not manage to repeat their pre-crisis growth performance, their superior growth relative to developed economies implies they will contribute an ever bigger share of global growth. Previous experience (Korea, for example) confirms that an extended period of high growth is possible for these economies and, if so, global trend growth must eventually be lifted higher,” Kamp says.
He says the emerging market economies have recovered swiftly from the crisis, notably those in Asia, as reflected in buoyant exports and industrial production, but they do need stability in developed economies, which remain an important source of demand for developing markets’ products.
But Du Plessis says emerging market equity prices, as measured by the MSCI Emerging Markets Free index, are primarily driven by commodity prices and, in particular, by metal prices.
“Currently, emerging market equities are fairly priced given the level of metal prices,” he says, but he believes that emerging markets can only continue to outperform developed markets as represented by the MSCI World index if metal prices rise substantially.