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Happy days are here again

11 February 2019 Jonathan Faurie

2018 was a tough year for investors and asset managers. It was a year that many within the industry would want to place firmly within their rear-view mirrors.

Fortunately, there is a lot more confidence in the industry. This confidence has survived a technical recession (at the end of 2018), major scandals implicating political leaders (within the context of the Zondo Commission into state capture), and global political worries. 

What investment trends can we expect in 2019? 

Standout opportunity

Despite the above-mentioned challenges, there are still a lot of opportunities within the investment space for those who are willing to take risks. 

Speaking at the recent PSG 2019 Outlook, Greg Hopkins – PSG Chief Investment Officer – pointed out that South Africa currently offers a standout investment opportunity. “The country’s economic and political challenges have compounded investor aversion towards emerging markets. We have been caught in a perfect storm: rolling five year returns of the FTSE/JSE All Share Index to December 2018 have only been poorer on four occasions over the past 40 years,” said Hopkins. 

He added that if the market inverts this thinking, creates the opportunity for potentially strong returns in the future. “Starting yields in both the fixed income and equity markets are high. Twenty-year government bonds are offering a normal yield of around 10% which translates into a real yield of 4% to 5% after inflation,” said Hopkins. 

Key solutions

The challenges in the South African investment space are not new. However, there are ways in which investors can mitigate these challenges. 

“Portfolios can purchase cheap insurance as hedging against challenges,” said Hopkins, “this insurance can comprise both direct offshore equities acquired at attractive prices relative to assessments of intrinsic value and local stocks with rand hedge like characteristics. Given that the rand is potentially undervalued, companies would require that each of these stocks present a significant margin of safety (it must be trading at a significantly lower price than companies believe to be fair.),” said Hopkins. 

He added that, additionally, multi-asset portfolios must retain healthy fixed income holdings. This adds an additional layer of diversification and buffers against declining equity markets.

“Finally, companies must insist on wide margins of safety for all of their holdings. Hopkins points out that ideally, the securities portfolios hold should already price in a significant number of potential downside and tail risks,” said Hopkins. 

A wide berth

Hopkins points out that while overall market valuations remain elevated when compared to historical performance, there continues to be pockets that are characterised by fear and uncertainty. In these pockets, low prices and low expectations have resulted in quality assets trading at wide margins of safety. 

“Global credit markets – particularly in the US – appear to be late cycle. Over the past decade, low inflation and low interest rates have driven investors to riskier assets such as corporate bonds that offer higher yields. However, the US corporate credit market is running extremely hot with signs that the current trajectory may not be sustainable. The main concern is liquidity risk as the debt inventories of large investment banks have declined significantly from more than $225 billion in 2007 to around $30 billion today. Retail investors now own 20% of corporate debt via mutual funds and exchange traded funds which, in theory, have immediate liquidity,” said Hopkins. 

Passive but smart

Janina Slawski, Principal Investment Consultant at Alexander Forbes Investments, told a press briefing that a trend that will take centre stage in 2019 will be that passive investing will continue to dominate, but will become smarter. 

“Passive funds continue to gather assets. This is being driven by the advent of zero-cost exchange traded funds (ETFs) which will likely accelerate the growth of passive investments even further. Looking globally, 86.7% of US active funds have underperformed their benchmarks on a net-fees basis over the ten year period ending in 2017. Further 85.4% of actively managed European equity funds underperformed their benchmarks over the same period,” saId Slawski. 

Editor’s Thoughts:
For investors who thrive on taking risks, there are pockets of opportunity in the market. For these investors, local will be lekker as there is currently more volatility globally than there is locally. Passive investing will still take centre stage, but smart beta will close the gap between passive and active to the extent that by the end of the year the industry may be ready to have a vigerous debate about the advantages of blending the two models. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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