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INVESTING WHERE TO INVEST A LUMP SUM IN 2018 FEATURE
31 January 2018
Investor sentiment appears ‘positive’ Should investors be prepared for relatively muted returns on global equities in 2018? MoneyMarketing asked Nadia Van Der Merwe, Business analyst at Allan Gray, how global markets are expected to behave over the next twelve months.
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lobal markets have been particularly strong over the past nine years. In fact, at the start of 2017, the US stock market entered its ninth year of a bull market that started with the 2009 lows. This represents the second-longest bull market in the S&P500’s history and the market has continued to rally over the past year. The solid returns have not been limited to the US equity market. Financial assets in developed markets overall have been strong over the period. One reason is the unprecedented level of quantitative easing (printing money to buy financial assets, thus driving asset prices up and interest rates down). Central banks globally have engaged in quantitative easing since the global
financial crisis (GFC) to encourage confidence and economic growth. With bond yields at very low levels, investors have turned to equities in search of returns. This has provided a tailwind to prices of developed market equities, in particular those that have defensive or ‘bond-like’ characteristics. As a result, prices and valuations in many developed markets appear stretched. We don’t believe the level of recent returns can continue indefinitely. It is, however, impossible to reliably predict a turn in the markets. Investor sentiment appears positive, and measures like the Volatility Index or ‘VIX’, which is constructed using the implied volatilities of a wide range of S&P500 index options, closed at its lowest level
PETER-JOHN MARAIS CFP® Director, Progressive Wealth
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ollowing a rather challenging 2016, investors were rewarded in 2017 for sticking it out in risk assets such as local and global equities. The JSE All Share Index has delivered 17.9% so far for the year of 2017 (as at 8 December 2017 and following the Steinhoff news), however, most of this return came towards the second half of the year (with 80% of the return coming since July). This truly reinforces the mantra of time spent in the market as opposed to attempting to time the market. As can be seen in the chart, the bulk of the 2017 returns were driven by the industrials sector, with shares like Naspers already providing returns in excess of 80% year-to-date. By contrast, local financials have been rather flat this year, thus going forward, presenting a few investment opportunities from a valuations perspective. With resources at a current P/E multiple of 14, this sector also offers investment opportunities worth some consideration. Asset classes that were winners in 2016, such as bonds and property, were more muted in 2017 and have delivered 5.5% and 11.1% respectively (at the time of writing). This subdued performance has largely been marred by political and economic issues facing South Africa, all of which have been reflected in investors movement of capital. Offshore assets have been rewarded significantly in rand terms, with strong global markets as well as the rand weakening over the last few months. The standout performers have been offshore equity, with developed markets (MSCI World Index) and emerging markets (MSCI EM Index) delivering 17.8% and 27.6% in rand terms. Looking at 2018, ratings decisions and the December ANC Elective Conference aside, we
ever in early November 2017. This is a clear indication of the complacency in the market regarding current valuation levels and prospective returns. Rather than focusing on the general level of equity markets, we spend our time on those factors that we believe are within our control. With risks skewed more to the downside, we are focusing on building diversified portfolios of undervalued assets. These, we believe, should be able to provide some protection against downside risk and deliver good returns, with the goal of outperforming global markets over the next few years. We pick shares on their individual merits. This means that despite valuation levels suggesting lower prospective returns going forward, there is opportunity to benefit from dislocation in valuations within and across markets, and to find businesses trading for less than they are worth. The global investable universe is broad and deep, and even in expensive
markets one can still find mispriced assets offering attractive returns. We believe the current opportunity set offers above-normal potential to identify attractive opportunities. For example, while valuations are generally steep for predictable businesses, the environment has punished companies perceived as uncertain. In many cases, such companies’ valuations have fallen to the cheapest levels since the GFC. We see opportunity in several of these shares. XPO Logistics and Abbvie, both US companies, are examples of two of our top holdings that have been penalised for uncertainty. We consider these companies to be trading on attractive valuations. There are also markets which haven’t experienced similarly high returns and where valuations appear notably lower. Selected emerging markets fall into this bucket. This is another area where we are finding value among individual stocks such as Chinese ecommerce companies NetEase and JD.com
The year that was and the year that lies ahead continue to believe that equity, both local and offshore, should continue to deliver positive results for investors. In line with the house views of our investment committee (Graviton), we will maintain an overweight position to offshore equity and maintain reasonable exposure to SA equity, within the confines of each of our client’s portfolio mandates. Bonds have displayed the most amount of risk, given the looming ratings downgrade and ANC Elective Conference which usually affects the pricing of local bonds, and given the abysmal Medium Term Budget Policy Statement and the R50bn deficit, these bonds should reflect a higher compensation for investing in them. At the time of writing, our view is to wait for more attractive yields before entering this asset class in a more material way. While the ANC Elective Conference from 16 – 20 December has been eagerly anticipated, the contest between the two front runners will be crucial for the country’s economic prospects. Nkosazana Dlamini Zuma and Cyril Ramaphosa seem to be the front runners with markets favouring a Ramaphosa victory. Should this transpire, the potential scenario could be
Source: Morningstar
a relief rally in fixed interest locally and some rand appreciation, likely to result in rand hedge stocks declining. This could also be short lived as South Africa’s economic problems still exist and the market will need to come to terms with the massive task Ramaphosa would face in getting SA back to its glory days. Should a Dlamini Zuma victory occur, the belief is that the market would not like this outcome and we could see bond yields spiking, a weaker rand, but an overall rise in SA equity given the strong rand hedge nature of SA equities (specifically industrials and selected resource rand hedges). In both scenarios, we believe the market will overreact and create opportunities to deploy capital where valuations are attractive.