World equity markets this year have for the most part been a diverse rollercoaster, impacted by varying international developments, considerable uncertainty and investors’ fear of losing money.
SA-based global equity funds, however, have significantly outperformed domestic equity funds, not least because of a weaker rand. This seems set to continue into 2019.
Returns of global funds in rand terms have ranged between 5% and 17% during the past 12 months. The top ones have all outperformed the MSCI World Index.
True, offshore returns next year may not be of the same magnitude as previously, but the flipside is that most quality offshore funds are exposed to superb companies across the world, most of which have performed superbly over time. Many, in fact, are currently mispriced by the uncertainty, which in itself presents great opportunities. Complacency is never an investor’s friend, however, and it pays to think ahead of present conditions.
Leon Kok spoke to Paul Hansen, who retired from Stanlib recently, but remains an adviser to it, about his views on international markets. Having consistently exhibited a first-rate grip on developments, he is currently pretty positive in outlook.
What aggregate global economic growth can we expect for 2019?
Probably between 3% and 3.5%, depending on how long the current slowdown in Europe, China – and next the US – lasts.
Are global equities still the place to be?
Yes. I think the bull market is still alive, even though only the US market has had a decent year so far. All the others have had a poor year.
Interest rates remain extremely low in Japan, Europe, the UK, Australia and most of the world, even in the US (despite eight hikes so far) where CPI inflation is still low at 2.3% and the 3-month Treasury Bill (similar to cash) is at 2.35%. Australia, which hasn’t had a recession for over 20 years, still has rock-bottom interest rates.
For those investors seeking enhanced long-term returns, where should they be looking?
Developed and emerging markets. There have been serious corrections in both, namely -19.5% in Europe in dollar terms, and -26% in emerging markets, also in dollar terms. The MSCI Emerging Markets Index, in fact, is back at levels first seen 11 years ago in 2007, and 2010 to 2015.
Given that the S&P 500 is down somewhat from its recent record high, are we in for a deep and protracted slowdown?
No. I think the -10% correction is probably about it… another normal correction in the long bull market.
The US economy has many supports, including rising earnings, strong employment, higher wages, improving productivity, healthy consumer balanced sheets, rising household formation and the effects of government stimulus. Also, businesses are confident in it as indicated recently by Berkshire Hathaway’s $1bn share buyback.
One might also add that over 66% of S&P 500 companies have reported third quarter earnings so far, and, at this stage, it looks like they’ll be up 27% year-on-year, which is very strong and only slightly below the +28% of the second quarter. This is an important support for shares.
Is the outlook for US interest rates a key risk facing global markets?
Yes, it is. Although the Fed has signalled a gradual rise and, so far, inflation remains very muted. At this stage, it’s not a major risk, as long as inflation remains muted around 2.3%. The oil price has corrected by -21% of late, which will help too. Commodity prices in general are down, while the dollar is near its high for the year, also dampening inflation.
What’s the investment case for Japan?
Trading around 13 times earnings, it’s attractive with rock-bottom interest rates. The economy has been growing at around 1.9%. Domestic demand is also intact. Market participants believe that upbeat capital spending could lift investors’ risk stance. The downside is that Japanese manufacturers could be hit by falling demand from China.
What about China and other Asian Tigers?
The Chinese market is down heavily from its late January high (-33% at its recent low, in dollars), trading at just 11 times earnings, so it looks attractive, as well as the Asian Tigers. Their currencies have also weakened, so there could be a double whammy recovery.
Outlook for emerging markets generally?
If one takes a positive view on the tariff story with the US, then the outlook is good. If tariffs get worse, then the dollar will probably continue to gain and hurt emerging markets generally.
Which global sectors do you expect to outperform?
IT, financials, industrials and materials.
What sectors would you determinedly avoid, albeit that they could also outperform off low bases?
Interesting is that most top-performing SA global equity funds are funds of funds. Old Mutual Global Equity Fund is perhaps the exception. Does this tell us anything structurally about optimal choices of global funds?
I don’t think so. Stanlib’s are now all feeder funds and the global equity fund has done well.
Which offshore funds do you particularly like?
Old Mutual, Orbis, Stanlib Global Equity and Stanlib European Equity (the latter because of the big correction in the euro and in European shares this year).