Financial Mail - Investors Monthly
REAL RETURNS
Emerging markets have surprised many with their resilience
The monetary policy and fiscal interventions applied to mitigate the pandemic’s economic fallout have left global investors with few options in their hunt for returns.
Central banks will likely keep interest rates low to support spending and growth, even as inflation trends to the upside.
“With global interest rates as low as they are, most traditional global fixed interest assets are poor investments,” says Christo Lineveldt, investment specialist at personal investments, Coronation Fund Managers. “Global cash provides no real return, while most developed-market government bonds represent return-less risk. The current negative real yields on offer are, in essence, a form of financial repression that places a burden on savers.”
Persistent low interest rates over the near term will compound the negative real returns from fixed income that global investors have struggled with in recent years.
“And the US, Europe and Japan are still offering negative bond yields and thus negative real returns,” says Marc du Plooy, MD of Wealth Associates SA.
So global investors will need to look to equities for growth and returns. While the risk of short-term market volatility persists, equities stand to benefit from vaccination programme rollouts and easing lockdown restrictions, which will provide the impetus for an economic recovery.
“Investors are feeling more comfortable that the world will recover from the pandemic at some point in the near future and that the significant fiscal stimulus aimed at getting economies going will drive consumption,” says Du Plooy.
Chris Potgieter, MD of Old Mutual Wealth Private Client Securities, says a prudent approach to portfolio construction requires exposure to the right asset classes. “Within equities, this means striking a balance between defensive and growth businesses.” Growth sectors include technology and health care, which have benefited from the pandemic’s transformative shifts.
“Broadly speaking, a typical global equity portfolio would be heavily invested in US multinational companies with selected UK and European multinationals. These will … provide an investor with exposure to developed and developing markets,” Potgieter says.
Du Plooy adds: “Investors are focusing on value stocks in First World economies, and emerging markets in general, which are offering value across most sectors.”
When constructing a portfolio based on value stocks, Rob Forsyth, head of quality research at Ninety One Asset Management, says it is important to understand the business models and idiosyncratic factors of the companies.
“While taking a balanced macro view is beneficial, we do not make investment decisions based on prevailing macroeconomic factors. Typically, we look for companies with low tax rates, strong balance sheets and robust models which benefited from trends that preceded the pandemic, and have since intensified.”
These trends include ecommerce, working from home and the unfolding emerging-market shift from a labour-intensive to a capitalintensive focus, among others.
Ninety One focuses on companies that will continue to grow and compound returns, regardless of factors such as interest rates or inflation. “Typically, we like companies that spend money to create barriers to entry over time, such as health-care businesses.”
Forsyth also highlights opportunities in capital-lite financial services, which are still showing good growth. “In contrast, banks might do well, but they carry lumpy risk and are unlikely to grow over time.”
And Forsyth remains wary of broad tech sector exposure. “We prefer companies with a business, rather than a consumer market, focus. We believe regulatory risks are slightly lower in this segment.”
Victoria Reuvers, MD at Morningstar Investment Management SA, adds that emerging-market stocks have started outperforming developed markets recently.
“Despite the recent strength, emerging-market equities from Mexico and emerging Europe are considered among our preferred equity regions, alongside UK, European and Japanese equities.”
Reuvers says emerging markets have surprised many investors with their resilience through the pandemic, with this asset class buoyed further by the lower-for-longer outlook for US interest rates.
“However, nuances make it problematic to bundle emerging-market countries. For example, China has done quite well, given the prospects of a pro-cyclical economic recovery and low Covid-19 cases.”
Ultimately, an agile investment strategy built on portfolio diversification across asset classes, geographies and equity styles is vital in a global environment that remains volatile.
“Longer term, we believe investors should consider the possibility of higher inflation as an additional form of financial repression. So we continue to prioritise assets that are more likely to generate real returns, such as equities, listed property, gold and other precious metals, inflation-linked debt and infrastructure,” Lineveldt says. ●