Stocks taking us into 2017 and top global trends
Old Mutual Investment Group shares its 2017 investment outlook which includes top macroeconomic investment themes and key investment themes for emerging markets.
Top 5 Global Trends:
1) Global rise of populism pressures goverments
With Brexit, the election of Donald Trump as US President elect and growing support for ultra-conservative right-wing parties in Europe, developed country governments are coming under increasing pressure to deliver on the demands of – and, in the case of the US, promises to – their electorates. After years of mediocre growth in the wake of the 2008 financial crisis, the gap between rich and poor has grown and voters have become increasingly disenchanted with the establishment, seeing politicians and the elite as often the primary beneficiaries of an economic system that appears to favour the wealthy.
The path of the US will be defined by Trump’s transition from being a seemingly chaotic campaigner to having to govern effectively, while delivering on the many ambitious promises he made during the elections. The UK’s economic trajectory will hinge on the time it is likely to take to complete Brexit and the conditions associated with its withdrawal from the European Union. In Europe, the political ramifications of the constitutional referendum in Italy and elections in France in May will reveal how deep and wide support has become for populism.
How to respond: With global politics taking centre stage, it will be necessary to have a much deeper understanding of political developments − in order to discern between policies that are actually likely to be implemented and those that will become little more than political rhetoric. Of particular concern for SA are policies that impact trade and those that lead to increased volatility in the rand.
2) Trumpflation boosts growth
With Trump as President elect of the US, we can expect more fiscal stimulus, higher inflation and, ultimately, higher bond yields. This policy stance is likely to be transposed onto other Western economies as politicians realise that if they impose more fiscal austerity, they could well lose office. After eight years of quantitative easing (QE), more fiscal spending is exactly what Western economies need, along with a little more 5 inflation. What are also needed are higher rates (for healthy banks and a better functioning savings and lending system).
How to respond: The shifting policy environment means we can expect more turbulence, a stronger US dollar (so global emerging markets are likely to come under pressure for a while), much higher bond yields and a speedier upward climb in interest rates by the US Federal Reserve. In time, this pro-growth agenda should also translate into higher equity markets.
3) South Africa surprises on the uprise
In SA, 2016 was characterised by anaemic growth, concerning political developments and the threat of sovereign rating downgrades. 2017, however, could be better than anticipated for the economy as many of the shocks experienced over the past few years have waned (electricity load shedding, commodity price collapse, rand slump and drought). Positive developments could include the rand moving sideways or even firming, interest rates declining earlier than expected, the labour environment stabilising, business and consumer confidence improving, a reversal in food price inflation and commodity prices continuing to improve. Against this backdrop, economic momentum would build up and an upside surprise to growth may well be achieved.
How to respond: SA bonds stand to benefit from an upside surprise, given the higher yields they offer, making them attractive to foreign investors in a world where interest rates and prospective investment returns remain relatively low. The SA equity market would also perform well.
4) Investors reach for a blend of active and passive investments
Investors are now appreciating the numerous benefits of a blended strategy of both active and index investing, which include:
• Lower costs: Balanced index funds have lower costs than their active counterparts. This means a blended strategy would decrease overall cost, putting more of the return in the investor’s pocket.
• Diversification: Holding a balanced index fund in a blended portfolio reduces the risk associated with holding just a single active balanced fund.
• Consistency and peace of mind: An active manager has discretion to change their asset allocation – which can result in outperformance but, equally, in underperformance. A balanced index fund, however, broadly maintains its asset allocation. And each asset class performs in line with the index representing that asset class due to the nature of this investment strategy. This ensures the investor consistently gets what they paid for, which translates into increased peace of mind.
How to respond: Find an investment solution that blends both active and passive funds to ensure you achieve optimum risk-adjusted returns and lower your costs. Indexation frees up both your fee and risk budget, which can then be allocated to higher conviction active managers, giving investors the best of both worlds.
5) Business actively engages with government in SA
As the extent of corruption in many SA institutions is revealed, the partnership between business and right-minded government leaders will become more important. What began with a handful of senior business leaders meeting with Government in the wake of Nenegate and managing to negotiate the appointment of respected Finance Minister Pravin Gordhan, has evolved into the Save South Africa campaign − a movement that is supported by a wide group of concerned stakeholders, including business, clerics, trade unions, community groupings, former government ministers and several high profile ANC members. It is this partnership that helped prevent the second attempt to charge Gordhan with fraud and enabled the release of Thuli Madonsela’s State Capture Report.
How to respond: Understand that domestic political risk is likely to remain elevated and that financial markets will be volatile, given the extent of foreign investment in our stock and bond markets. However, business’s response underscores the importance they accord governance within SA and explains the resilience of the companies constituting our equity market. The united efforts to rid South Africa of its corruption should boost investor sentiment.
Stocks taking us into 2017
• Remains significantly undervalued
• Continues to benefit from exposure to Chinese consumers through Tencent
• Management skilled at unlocking value in the “rump” (“rump” represents the other businesses in e-commerce, online classifieds and pay TV), which should drive growth further in 2017 (e.g. the recent sale of Allegro for US$3.2bn)
• Current share price implies paying for Tencent, but getting the “rump” for free
BARCLAYS AFRICA (BGA)
• Trading at a significant discount to its long-term history, with meaningful upside to current share price
• Retail bank in South Africa has the potential to grow earnings and unlock value
• Growing non-interest revenue (NIR), with the potential to leverage the balance sheet, given historic low loan growth. Well positioned for a recovery when they start lending more aggressively
• Sale by Barclays plc should be seen as a positive
• Comprises a diverse portfolio of good quality defensive assets across, among others, healthcare, banking and media
• Trading at a significant discount to net asset value (NAV) of underlying investments
• Experienced management team with track record of adding value
• Core businesses (Mediclinic and FirstRand) are likely to continue delivering strong performance
• Defensive business operating in a growth industry (ageing populations and spend as a percentage of gross domestic product growing)
• Outlook supported by a growing demand for private healthcare in both SA and the UK
• Largest private hospital group in SA and the UK (secured by high barriers to entry)
• Rent deal in the UK will be value enhancing and may result in buyout of UK minorities
• Diverse geographical footprint and revenue streams across Europe, Africa, Australia and Asia (6 500 retail outlets across 30 countries)
• Europe’s second largest discount retailer will benefit from a European recovery
• Synergies from the Pepkor deal (acquired in 2014) and growth from strong store rollout still to come through
• Extensive property portfolio gives them a number of potential options and natural margin expansion opportunity
The Old Mutual Investment Group report also covers the following topics:
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