With the developed world imploding, it would make sense for investors to align their portfolios to benefit from the emerging-markets growth story. But evidence suggests there is no correlation between economic growth and superior market returns.
An academic study by Dimson, Marsh and Staunton last year of the portfolio performance of 83 countries based on historical gross domestic product (GDP) growth from 1972 to 2009 concluded that the highest returns came from the lowest-growth countries.
Returns are a function of the price an investor pays for the investment in the first place. Economies that are expected to deliver above-average growth rates tend to carry higher ratings and investors are prepared to pay a premium for the potential growth but invariably they end up overpaying. “Over the long run, there isn’t a positive relationship between a country’s real GDP growth and stock-market returns,” said Piet Viljoen, chief executive of asset management company RECM.
South Africa, for example, has been one of the top-performing markets in dollar terms over the past decade, outperforming countries such as China, and yet the country has only notched up about 3% real growth on an annualised basis compared with double-digit real GDP growth in China.
South Africa’s performance has more to do with the starting point in terms of valuations a decade ago. “South Africa was out of favour and private investors and corporations alike were fleeing our shores for safety in global markets. South African equities were cheap as a result and the rand was undervalued, which we believe is the main reason that returns turned out to be good for those who invested at the time,” Viljoen said.
Even if one discounts the rand’s strength, in base currencies the JSE has delivered 200% compared with Shanghai Stock Exchange’s 51% return since 2003.
There are two opposing views on emerging markets. The first argues that these markets have run hard over the past 10 years and developed markets may offer better value; the other is that Asia is a long-term story that has just begun.
Investors could get exposure in the emerging-market growth story by seeking American and European companies with earnings in developing countries. Take Coca-Cola: 50% of its earnings come from outside the United States and is geared to the emerging market. Microsoft, Apple and YUM Brands, which owns KFC, are other examples of American-based companies capitalising on emerging-market growth. The top 100 American companies now rake in 68% of their earnings abroad, on average.
Investec Asset Management’s Global Franchise Fund, for example, invests in high-quality global companies irrespective of where they are listed. “We choose the best companies wherever we find them. It just happens that 20% of the best companies are listed in the US,” said strategist Michael Power.
There is still an argument for direct emerging-market exposure, though. Andrew Brotchie, head of product and investments at Glacier International, a division of Glacier by Sanlam, said volatile market forces would continue to prop up emerging-market equities for at least the next 20 years as fund managers shifted their allocations towards them.
Investing from SA
The number of rand-denominated emerging-market funds in which South Africans can invest is limited and investors who want to have sector or country-specific exposure have to use their foreign investment allowance of R5-million.
- Coronation Global Emerging Markets Flexible Fund is a foreign asset allocation fund that has a strong equity bias. It has delivered a 15.5% return a year over the past three years.
- The Old Mutual Global Emerging Markets Fund was launched on August 17 this year.
- The Stanlib Africa Equity Fund has returned -18.45% in the past year.
- The Momentum Africa Fund has returned 8.81% a year over two years and 0.03% over one year.