Sanlam Private Investments Favours Equities Both Locally and Offshore

Key take-outs from quarterly investment wrap up:

• SPI UK team favours Google, Yum Brands, Colgate Palmolive, LVMH and Diageo
• Better returns predicted for equities than bonds in next three years
• SA investors should take advantage of offshore allowances
• Romney win seen to be more investor friendly than Obama, especially from a taxation point of view

Johannesburg, 30 October 2012: Despite tough macro economic environments and a wide range of uncertainties, both domestically and internationally, investors need to embrace risk by having reasonable exposure to quality equities within their investment portfolios over the medium to long term. This is the view of international wealth manager, Sanlam Private Investments (SPI). It also believes investors will receive a better return from equities than bonds over the next three to five years.

At its quarterly investment briefing in Johannesburg yesterday, SPI also recommended that South African investors looked to take advantage of generous offshore investment allowances by allocating around 35-40% of their portfolios to international investments not accessible in South Africa’s financial markets.

“Naturally, this percentage could be lower for elderly people who need to more closely match their assets with their liabilities here in South Africa,” said Alwyn van der Merwe, SPI’s director of investments, stressing that it made good investment sense to diversify and gain access to a wider pool of attractive assets.

Within South Africa, Van der Merwe said equities were likely to move modestly higher although it was tough to find “compelling value” in quality companies. Property needed to remain an important element within portfolios. He said that while there appeared to be a large valuation gap between resource shares and their industrial and financial counterparts, this gap could be sustained if the outlook for global growth continued to look risky.

While analysts expected resource companies’ earnings to slump by around 30% this year, they were looking for top industrial stocks to grow earnings by close to 20% and financial stocks by around 10%. “It is tricky to blend portfolios with resource shares that look cheap and industrial and financial shares that look a lot more expensive.”

International perspective

Commenting on international investment markets, Pieter Fourie, London-based head of global equities for SPI UK, said the enormous focus on high yielding bonds meant that this asset class was now looking expensive. “We are still seeing the unwinding of the credit bubble from a few years ago. Bonds have done very well at the expense of riskier assets,” said Fourie.

“There has been very little return from international equity markets in the past five years, but a rotation into equities is underway with a strong preference for high quality companies with sustainable earnings yields.”

Among Fourie’s top stock picks are companies such as Google, Yum Brands, Colgate Palmolive, LVMH and Diageo, all of which have major international footprints and strong growth potential. He said Microsoft could be a “fallen angel” that could provide good future returns.

Fourie stressed that SPI’s global equity strategy was to invest in companies with strong balance sheets and low debt to earnings. They also had to have a competent management team the ability to compound returns at superior rates for long periods of time.

He said SPI’s global equity plan was to invest in a concentrated portfolio of high quality companies, operating in industries with high barriers to entry and low capital intensity. SPI’s goal was to actively manage position sizes within a focused universe of stocks.

Other insights in brief

Underpinning the argument for investors to have offshore exposure, said Van der Merwe and Fourie, was the fact that while the JSE had enjoyed a strong 24% gain in rand terms over the past year, developed markets had achieved returns of 22% and developing markets 17% in dollar terms.
Although market volatility was an understandable concern for investors, Van der Merwe emphasised that it provided opportunities for fund managers to build longer term wealth for their clients. While there had been considerable volatility in world markets over the past three years, this had been highly correlated with change in news flows, he said. Equity markets had closely followed macro economics, so it had not really been a stock picker’s market.

Looking ahead, Van der Merwe said the world still had a two-speed global economy with the developed countries – especially in Europe – struggling and developing economies still growing at a reasonable rate.

On the upcoming US Presidential Election taking place in early November, he predicted that US financial markets might react more favorably to a win by Mitt Romney, who was seen to be more investor friendly, especially from a taxation point of view.

“However, there could also be some positive reaction to a second term for Barack Obama as the market will know what to expect from his administration,” added Van der Merwe.