Shaun Harris
TAKING STOCK
It’s pretty scary being part of the real financial world again. Local investors have all these new factors to consider – not only the obvious shocks like the Asian crises of two years ago, but also events that in the past would hardly have been felt in the South African economy.
Take the rise in United Kingdom interest rates two weeks ago. Incredibly, that seemed to have more effect on Johannesburg Stock Exchange (JSE) share prices than the declining trend of local interest rates.
But our reintegration with the global economy has its upside as well, particularly the whole new vista of investment opportunities it has opened up. Over the next few years it seems certain that exchange controls will fall away completely, but even the partial relaxation of controls offers lots of scope to invest offshore.
Asset managers and financial advisers have drummed home the message by now that any truly diversified investment portfolio must be partly offshore – somewhere between 30% and 50% of investment assets is the rule of thumb. The problem is overseas investment is expensive, though some more affordable products are coming into the market.
A general global fund is fine, but depending on the skill of the managers will not always give the best returns. The active investor might prefer to take their own view on world markets and the economies of different regions, and channel their money in that direction.
So what’s the outlook on different world markets? Overall, prospects for global growth are good, but be wary of the United States, take advantage of the recovery in Europe and expect a possible share price correction in the short term.
That’s a rough summary of the view of Aidan Kearney, a director at London-based Singer & Friedlander Portfolio Management. It’s also largely backed up by forecasts from local investment banks and asset managers.
Kearney says we are presently in one of those rare periods where growth in global economies is synchronised. The underlying trend is encouraging, but this synchronisation is also a problem.
“The big fear is inflation, and that’s coming from the US,” he says. “A slowdown in the American economy is expected, but growth will still be positive. The dilemma is that against this background of a slowdown US interest rates are rising to fight inflation, a combination that could hurt the economy.”
Forecasts from Singer & Friedlander see US gross domestic product (GDP) growth of 3,4% this year, falling to 1,5% next year. That’s expected – the problem is that inflation in the US is forecast to rise from 2,1% this year to 2,8% next year.
Europe, the UK, Japan and the Far East are generally on a different path. GDP growth in euro land should move from 2,1% this year to 2,5% next year, with a small rise in inflation from 1,1% to 1,4%. In contrast, the recovering economies in the Far East, excluding Japan, are expected to grow from 3,9% this year to 5% next year, with inflation falling from 5,3% to 5,1%.
Nedcor Investment Bank economist Sandra Gordon has also warned of the danger of major regional economies outperforming the US, saying they will offer an alternative to US investment and could see capital inflows to the US slow and ultimately reverse. She believes that recovery in Europe and Japan will offset the slowdown in the US and lead to a soft landing, but “should the US economy unravel too quickly it could pose a very real threat to the overall global economic recovery”.
Kearney sees the risk in the short term coming from US interest rates rising at the same time as bond rates, creating tension between equities and bonds. “The rising bond yield shows the risk premium has returned to the market. Either bond yields will come down – which will be good for equities and deflect a sharp correction in the market – or equity prices will come down, possibly leading to a sharp correction in the US market.”
If that happens it will spill over into other stock exchanges, including the JSE. But Kearney believes such a correction would be a healthy, natural process. “If we look behind the possibility of a correction, we see that global economic conditions are not declining and inflation is under control.”
So what regional markets should investors be looking at for the best performance? Japan and some of the Far East countries should show outstanding growth, but risk here is fairly high.
Europe, on the other hand, is staging a strong recovery, particularly Germany, France and Italy which make up about 80% of the European economy. Smaller countries like Spain, Portugal and Ireland are booming.
Kearney says this recovery looks sustainable and is lower risk than the East. “There are also some important structural changes under way in Europe,” he says. “European investors have traditionally been very conservative, putting their retirement money into bonds. Now the younger, more worldly-wise Europeans are starting to move into equity markets. They are tired of seeing the Americans come in and take the equity returns.”
Steady growth in Europe, and the UK, coupled with the benign outlook for inflation seems to make this the region to invest in.
The problem for local investors is that many of the affordable, global unit trust funds have been capped as management companies reach the limit of their asset swap capacity.
There are plenty of foreign currency denominated funds, but minimum investment here tends to be high.
Singer & Friedlander, through local investment house Aurica Financial Services, have adapted their premier funds to make them more affordable. The chief difference between the managed premier funds and the new specialist portfolios is that the latter is confined to Singer & Friedlander funds, of which there are about 25. But minimum investment is still pretty demanding at $15 000 (just more than R90 000).
Marriott Holdings, also in conjunction with Singer & Friedlander (through an Isle of Man subsidiary) has just launched an US- dollar global fund that takes minimum monthly investments of R1 500. The pricing is certainly attractive, though the fund is fairly conservative and widely diversified – fine for a general offshore investment but not so much for those investors who want to go into one particular market.
The best option here could be the insurance funds. There are some limitations – for instance investors should be committed for at least five years to get the greatest benefit from the funds – but that’s a fairly standard time horizon anyway. Old Mutual’s Investment Frontiers funds, for example, have a minimum lump sum investment of R30 000 or R1 000 a month.
The advantage is that the funds are very specific – an investor bullish on Europe could choose a fund that invests exclusively in European equities, and switches can be made during the five-year period if global market conditions change.