Global In­vest­ing

Don­ald Trump’s trade war will af­fect how — and where— wise in­vestors put their money, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Front Page -

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

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