Equity markets in the emerging world have weathered the subprime credit crunch in developed markets more easily than any previous market turmoil, and are expected to remain a sought-after investment destination — if not a safe haven — for many years to come, according to Steve Minnaar, head of equity research at Old Mutual Investment Group South Africa (Omigsa).
Indeed, he says, this year’s shake-out of credit markets has helped accelerate the investor shift to emerging markets from the developed world that has been under way since 2001, and even highlighted the desirability of emerging-market assets. Investors are likely to take advantage of the expected faster growth rates and better relative returns to increase their exposure to emerging-market equities, including some attractive companies listed in South Africa.
Speaking at a recent presentation, Minnaar pointed out that emerging-equity markets have outperformed developed markets since 2001, with the MSCI emerging-market index moving up five-fold — from just above 250 points in 2001 to about 1 300 points currently. By comparison, the MSCI world index recorded an increase of just more than 70% over the same period.
In response to the subprime crisis in the United States, some key emerging equity markets like South Africa saw immediate drops of 12%. However, they quickly recovered, and subsequently the MSCI emerging-markets index has gone on to outperform developed markets. In fact, many investors reacted by shifting funds from the major developed markets to emerging markets. In the fourth week of September alone, $13-billion was withdrawn from US, Japanese and European equity funds, of which $5,5-billion went directly into emerging-market funds, according to EPFR Global, which monitors international fund flows.
“It’s still about the search for yield, and investors now have more knowledge of, and confidence in, emerging markets,” said Minnaar. “US fund managers typically seek returns of over 10%, which they can’t get in their own market or Europe — they have to look elsewhere.
“Citigroup’s recent poll of chief investment officers, representing over $1-trillion in assets under management, showed that professionals plan to increase their emerging-markets exposure from 5,7% to 15,1% of their portfolios over the next three years, while cutting US positions and maintaining those in Europe. Allocations to ‘other’ emerging geographies (like Africa) are expected to rise to 3,5% from 0,4% currently. This implies $94-billion in fund inflows to emerging markets between now and 2010.”
African markets should benefit from this trend, Minnaar pointed out, attracting investments due to robust economic growth and improved liquidity and regulation in recent years. A November 2007 report from the World Bank showed sub-Saharan Africa economies grew at 5,4% year-on-year (y/y) over the past decade, above the global average of 3,2% y/y, and are forecast to grow at 5,3% y/y in 2007 and 5,4% y/y in 2008.
“Too often South African investors look past Africa to more distant destinations for their emerging-market investments, but they shouldn’t forget to look closer to home. In sub-Saharan Africa today, outside South Africa, collective market capitalisation now stands at a substantial $60-billion.
“Although the economies of the region are dominated by resources, because most resource companies are listed elsewhere, sub-Saharan equity markets are, in fact, dominated by financial counters, accounting for 48% of listed companies. Financial services and consumer-related companies are growing strongly in many countries, and these sectors are among those that should see accelerating growth in the future.”
At the same time, he pointed out, individuals don’t have to invest in an emerging-markets fund to gain their exposure, but could easily build their own emerging-market portfolio with a handful of locally listed shares.
“We have numerous South African-listed companies with a well-established presence in emerging markets, like BHP Billiton, Anglo American, MTN, Standard Bank and SABMiller. There is also a second tier of companies that are now increasing their operations in emerging markets, like Didata, Shoprite, Vodacom and Telkom. With such good growth prospects ahead, local investors shouldn’t be afraid to include emerging-markets exposure in their equity portfolios.”
Meanwhile, on the economic front, Omigsa chief economist Rian le Roux said that with the global economy slowing, the key questions now are whether the US will go into full-blown recession and whether the rest of the world can escape a US downturn.
“Our view is that US recession risk has increased and it will be a close call,” he observed. “Nevertheless, we expect a recession to be narrowly avoided. On whether the rest of the world can escape a downturn, our view is ‘not entirely’, but the impact should not be as severe as in the past, as various transmission mechanisms have changed.”
As for South Africa, Le Roux noted that although the economy is slowing under the impact of previous interest-rate hikes, the risk of further interest-rate hikes is to the upside due to two important factors.
“First is that CPIX inflation remains out of the 3%-to-6% range and short-term pressures continue. There are also medium-term risks from administered prices. The second issue is that the current-account deficit is large, with commodity prices at very high levels. This makes South Africa very vulnerable to a decline in commodity prices.
“Therefore there is a good chance that the SARB [South African Reserve Bank] will hike interest rates by a further 50 basis points in December, but even if it does not, rates are unlikely to fall anytime soon,” Le Roux concluded.