Re­duced debt bur­den is key to sus­tained bull run in global eq­ui­ties

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

Do not let the past “lost decade” turn you off in­vest­ing in for­eign eq­uity mar­kets. De­spite the re­cov­ery in global share prices over the past year, some as­set man­agers re­main con­fi­dent that prices will con­tinue to rise in the decade ahead.

Eq­ui­ties in the United States had their worst per­for­mance over the decade to the end of last year, with the Stan­dard & Poor’s (S&P) 500 in­dex post­ing mi­nus 3.6 per­cent a year.

Rand in­vestors who in­vested in the Mor­gan Stan­ley Cap­i­tal World in­dex from 2000 to 2009 made a measly two per­cent a year, or an af­ter-inflation re­turn of mi­nus four per­cent a year, Peter Brooke, the head of the Macro Strat­egy In­vest­ments (MSI) bou­tique at Old Mu­tual In­vest­ment Group South Africa (Omigsa), says.

But if you want re­turns that are bet­ter than the blander ones we are told to ex­pect from lo­cal as­set classes, you may need to look past re­cent his­tory to what the fu­ture may hold for off­shore mar­kets.

The re­cov­ery in global eq­uity mar­kets over the past year has made some as­set man­agers cau­tious, be­cause they be­lieve shares are ei­ther at their cor­rect lev­els or too ex­pen­sive. Some man­agers who in­vest in what they re­gard as un­der­val­ued shares are putting funds in cash rather than buy­ing shares at their cur­rent lev­els.

In­vestec and Omigsa’s MSI bou­tique, how­ever, re­main con­fi­dent about the long-term re­turns from off­shore eq­ui­ties. Max King, a strate­gist and port­fo­lio man­ager for In­vestec, says there is a good chance that last year’s rally will evolve into a sus­tained multi-year bull mar­ket.

King says the is­sue of who will buy bonds to fi­nance the bud­get deficits in the de­vel­oped world is a sword of Damo­cles hang­ing over the de­vel­oped world’s eq­uity mar­kets. If the is­sue is not re­solved, mar­kets are likely to be dull, but they should not be down.

There have been re­cent ex­am­ples of gov­ern­ments, notably those of Canada and Swe­den, act­ing suc­cess­fully to re­duce mas­sive deficits, and sim­i­lar ac­tions would be very bullish for eq­uity mar­kets and pos­i­tive for long-term eco­nomic growth.

King says that since 1871 eq­uity mar­kets in the de­vel­oped world have been through sev­eral flat pe­ri­ods, each of which has been fol­lowed by mul­ti­year bull mar­kets.

De­vel­oped mar­kets have now been dull for 10 years and the S&P 500 in­dex can still rise 40 per­cent without break­ing out to new highs, he says. “His­tory sug­gests that this would be the start, not the end, of a long-term up­ward trend.”

Global eq­ui­ties do not look cheap based on his­tor­i­cal earn­ings, but prof­its are ris­ing strongly and fore­casts are be­ing up­graded, King says. On this ba­sis, mar­kets are good value, but a res­o­lu­tion of the prob­lem of high fis­cal deficits may be nec­es­sary if this is to be trans­lated into higher eq­uity rat­ings.

King says In­vestec ex­pects that emerg­ing mar­kets will con­tinue to mod­estly out-per­form de­vel­oped mar­kets, be­cause eco­nomic growth is likely to be higher in th­ese coun­tries, emerg­ing mar­kets re­main un­der­val­ued and the qual­ity of the com­pa­nies op­er­at­ing in th­ese mar­kets has in­creased sig­nif­i­cantly.

Brooke says off­shore in­vestors will get a bet­ter re­turn from eq­ui­ties than bonds and cash, rev­ers­ing the trend of the past decade. Th­ese global mar­ket re­turns will be boosted by the ex­pected grad­ual de­pre­ci­a­tion of the rand.

He says many mar­ket com­men­ta­tors are con­cerned about short-term mar­ket risks, such as those posed by gov­ern­ments de­fault­ing on their debt, cen­tral bank stim­u­lus pack­ages fail­ing and mon­e­tary pol­icy er­rors – for ex­am­ple, with­draw­ing easy money too quickly.

But Brooke says th­ese risks, as well as those pre­sented by dis­eases, wars and dis­as­ters, will cause mar­ket cy­cles that have occurred be­fore and will oc­cur again, but they will not de­rail the longer-term trend. In­vestors would do well to ig­nore much of this noise.

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