It’s not just the oil price that makes off- shore investing a slippery business Neil Thomas Trying to take a view on world investment markets right now, particularly equity markets, entails an intricate egg dance. And it’s a curate’s egg you have to dance on. It’s been a long time since international markets have looked so tricky. But the Johannesburg Stock Exchange is also pretty directionless at the moment, so a view has to be taken. The overriding motivation for taking a closer look at world markets is the fear and loathing streaming out of the United States. In earlier bull-run days, investing offshore was an easy choice for local investors – you chose from the number of funds with a high weighting towards US equities and, together with the declining rand, good returns were assured.
But that’s all changed now, and there are a number of signs that it could get worse. As an illustration, over calendar 1999 the Nasdaq index increased by 85,6% and the Standard & Poor’s 500 (S&P 500) by 21,1%. What an easy way to make money. However for the year to date, the Nasdaq is down by 9,7% so far and the S&P 500 by 1,4%. That’s quite a remarkable swing, and shows the high volatility of US markets. Another sign of Nasdaq volatility is this little statistic from Old Mutual Asset Managers in the United Kingdom. A movement of 2% in the index, up or down, is taken as the benchmark for volatility, and so far this year the Nasdaq index has moved more than 2% on over 60% of trading days. That means it’s nearly as easy to correctly choose black or red at the casino as it is to guess which way the index will move on a particular day. The big fear is that US equities are highly overpriced and that strong corporate earnings seen earlier will slow with the slowing economy, leading to severe market corrections. Compounding fears is the rampant US dollar, which has beaten down the value of a number of developed and emerging market currencies and seems likely to deflate at some stage. Prudent offshore investors will therefore be looking for other regional homes for their money. This was also a relatively easy task earlier this year, but then the oil price spiked at over US$30 a barrel and now the threat of sustained conflict looms in the Middle East. And there’s nothing like a war to bugger up an investment plan. Of course the more cautious investor will leave the regional decisions in the hands of the professionals. As a starting point there are 16 foreign general equity unit trust funds to choose from (though a number of these are closed to new investment at the moment), as well as a fair selection of global theme funds. Multi-management is also an easy route for investors who don’t want to be actively involved in regional decisions. There are plenty of options, but one investment house that is building a solid track record for offshore multi-management is NIB Multi- Manager, which offers funds according to investor risk profiles. But more daring investors will want to make the decisions themselves. Local rand denominated unit trusts offer some scope here – both Sanlam and Standard Bank offer European growth funds, and Old Mutual has region-specific funds for the Asia Pacific, Europe, Japan, Latin America, North America and the UK. So where to invest? What follows are a selection of views from international fund managers on world markets. l The US – This is probably where you don’t want to be right now, though it’s also worth remembering that some very respectable asset managers have been incorrectly calling the top of the US cycle for the past three years and have lost clients superior returns as a result.
However, the signs are there that the markets have overheated, not least in the recent spate of downgraded earnings reports from some top US companies. Economic growth has started to slow, and though it looks like Federal Reserve chair Alan Greenspan will engineer a soft landing, slower growth will effect corporate earnings, particularly as they are coming off a high base. Robin Griffiths, chief technical analyst for HSBC in New York, condenses his view on US markets in two words – “time out”. He describes the sharp drops seen in the Nasdaq index as “a high-tech wreck, reality check”. l Europe – As a whole the continent was looking pretty good earlier this year, but has since been hammered by a number of macro-economic negatives. The euro has taken a pounding, even worse than the rand, from the strong US dollar. This has put pressure on the price of imports, exacerbated by the high oil price. The result is rising fear of inflation, spurring the European Central Bank to raise interest rates earlier this month. That will slow economic growth and company earnings, so this region is probably best avoided for the remainder of the year. l Japan – Expectations of a great recovery in the Tokyo market after the speculative property bubble burst have been delayed, with the Nikkei 225 index down by 21,2% so far this year. NIB International believes that consumer demand, which makes up two thirds of Japan’s gross domestic product, needs to pick up to get the market moving. The problem is the Japanese tend to be cautious spenders and obsessive savers, so this could take time. Prospects seem fair but it’s probably wise to hold off for a while.
l UK – By default, the FTSE is looking good. Griffiths summarises it like this. “It [the UK market] is good value in absolute and relative terms with reference to both the world and core European markets. It has become so by going nowhere for over a year whilst others have risen.” The UK is suffering less from the inflation fears stalking Europe, and sterling has held up pretty well against the US dollar. The tech fall-out affected the market, but other previously bombed-out sectors like construction, engineering, cars, chemicals and property could make a comeback. l Latin America – Performance varies greatly between countries on this vast continent, but earlier this year Mexico and Brazil were the darlings of international investors. Economic growth in the larger countries should remain good, but they are also suffering from the high oil price and low commodity prices. l Asia – Quoting JRR Tolkien (The Hobbit), Griffiths reminds investors: “Never laugh at live dragons.” Generally, Asian markets are currently viewed as being in a bear trend, but these emerging markets always have the ability to surprise. Taiwan has dropped by more than 40% since its peak earlier this year, mainly due to political fears that companies supporting independence will be barred from doing business with mainland China. But the fundamentals remain good. Griffiths says some of the larger Chinese shares – the Red Chips – are also starting to look interesting. l Israel – This was one of the best-kept investment secrets of the year, but unfortunately the Tel Aviv index is likely to suffer from the conflict. What had Israel as the fourth best performing emerging market was the high skills level of its software technicians and companies, receiving a lot of orders from Silicon Valley. If there’s a speedy resolution to the fight with the Palestinians the market could be worth going back into. l Russia – Now here’s an amazing tale. Suresh Sadasivan, emerging markets analyst with Omam (UK), says the high oil price affecting growth around most of the world is doing wonders for Russia. As a major oil producer, the high price is boosting the trade surplus and proving to be more lucrative than even the export of blonde Russian brides. This in turn is raising tax collections and stimulating other sectors of the economy, in the process easing inflation (down to below 20% from around 100% last year), allowing for lower interest rates and boosting the rouble. Admittedly off a low base, the rouble has been one of the few currencies to strengthen against the US dollar this year. The rising level of economic activity is making Russia one of the top performing emerging markets this year. Sadasivan cautions there are investor concerns over corporate governance and political interference in business, but South African investors should feel at home with minor issues like these. Of course there’s a lot of risk, but the brave investor with cash to spare should maybe pour a shot of Vodka, down it, and plunge into the Russian market. It’s amazing what a counter-revolution can do for share prices.