In­vest­ing be­yond our bor­ders in the cur­rent global econ­omy

Weekend Argus (Saturday Edition) - - GOODPASTIMES - LAURA DU PREEZ

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.


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.


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.

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