Donald Trump’s trade war will affect how — and where— wise investors put their money, writes Johann Barnard
By the midpoint of 2018, investors would have been justified in feeling ill at ease. The expected boon to the economy from President Cyril Ramaphosa’s business-friendly overtures had failed to materialise, leading the SA Reserve Bank to revise its growth forecast to a mere 1.2%.
Though we’ve become accustomed to living in a lowgrowth environment, global markets have offered some hope of above-inflation returns. But that may now be under threat due to the trade war that the US has unleashed on friends and foes alike.
The effect could be sudden and brutal — as was seen in mid-August, when the already under-pressure Turkish lira tanked, leading to a slump in the rand.
Investors are therefore justified in feeling skittish about whether and how to bolster their offshore portfolios.
Philip Saunders of Investec Asset Management says the next six months will be crucial for settling investors’ nerves about where global markets stand. Key indicators to look out for include a further slip in China’s growth, whether US growth can be sustained, and the effect on inflation and interest rates in that country.
“Investors will have to be highly selective until we have a better handle on where the US rates are going to end up,” says Saunders.
Meanwhile, corporate earnings in developed markets have been good, though there has been a lot of volatility. Saunders says valuations outside the US have moderated somewhat, and despite the long US bull market, the valuations there are underpinned by solid earnings dynamics.
“The big issue is that we’re in a late-cycle environment, which complicates the judgment calls,” he says. “From the second half of 2017, we have moderated our exposure to equity markets, but [we] are not outright defensive. Investors shouldn’t be overly defensive and should have a developed-market skew in their strategy, but [they] need to have a balanced exposure.”
Obviously, the exact nature
It is almost a dereliction of responsibility for a discretionary fund manager not to put a fair amount of clients’ money overseas
and proportion of an offshore component in a portfolio is going to differ from one person to the next.
And that strategy should be informed by one’s goals. Someone who plans to remain in SA and retire here, for instance, may have a less pressing need to externalise money and generate returns in hard currency.
Irrespective of those circumstances, Sasfin’s Bruce Ackerman says it is not beyond reason to have more than half of assets in global markets.
“It is almost a dereliction of responsibility for a discretionary fund manager not to put a fair amount of clients’ money overseas,” he says. “We would say a bare minimum of 30%, but an unconstrained investor who doesn’t have any income requirements should have way over half overseas.”
He says that from a bottomup basis, a number of stocks look attractive. But Sasfin’s Global Equity Fund also applies a top-down approach that looks at themes rather than country-specific markets. And many of these themes are not available to investors restricted to the local bourses.
Ackerman cautions against conservative funds such as balanced funds that have much lower yields because the returns on bonds and cash are so low in comparison with local bonds.
“For capital growth, go overseas into equities,” he says.
Where exactly to take money is a question that is answered simply: wherever the opportunities are.
Investec’s Saunders sees opportunities in the changing market dynamics in China, for example.
He says the country’s progress in technological development will continue, and that it is strong enough now to handle competition entering its economy. This will in turn raise standards and make its manufacturers more competitive.
He also sees opportunity in Japan as a developed market economy with interesting potential. This is due to its currency being cheap, and weak markets that have driven valuations lower despite good earnings growth.
“On an individual stock basis, Japan has good companies in technology niches and some of their domestic stocks are pretty attractive,” he says. “The better companies are improving their balance sheet efficiency, and they have attractive valuations and improving quality. That is a powerful combination.”
This single-minded approach to evaluating stocks and the opportunities they present is a recurring theme among fund managers responsible for protecting clients’ capital. Should the worst trade war fears be realised, they will be looking to protect against the downside risk.
The quandary, of course, is that tit-for-tat trade tariffs have only just been introduced. The quantum of the effect thereof will eventually determine how markets respond, and that effect — as Saunders suggests — might only be visible about six months from now.
Bruce Ackerman … Outspoken about investing abroad