Investing for the upturn (it’s not where you think)

Bronwen Barclay, Marketing Manager at Marriott, suggests that weak global markets and a strong rand afford a perfect opportunity for SA investors to lock in some currency exposure without experiencing a drop in yield.

The South African economic cycle lags the global one: the domestic economy has dipped some six months after that of the US. Marriott therefore expects that the major economies are likely to recover before SA does and investors could hence benefit from this earlier turnaround by taking capital offshore now.

The question of whether to take assets offshore is being hotly debated by the investment community: the market bulls are once again ready to enter the international arena while the bears are still somewhat hesitant. The global financial crisis has seen the worst bear market since the aftermath of the crash of 1929, when the Dow plunged 89% and the S&P 500 index tumbled 86%. But markets remain cyclical and analysts all over the world are watching every financial result and murmur in anticipation of the “bottom”. When considering an investment in international equities, it is interesting to note that since 1932, the S&P 500 has gained an average of 46% in the year after stocks hit a bottom.

The heightened value evident in some of the biggest and most popular brand name companies in the US, Europe and the UK is a strong buy signal. For example, Johnson & Johnson, founded more than 120 years ago, has paid a continually increasing annual dividend for more than 30 years, rising an average of 14.6% p.a. The stock is currently on a dividend yield of 3.7% and one can buy British American Tobacco on a yield of 5.7%. Markets are cheap and investors should act accordingly. In addition, the rand has been very strong recently as foreign investors seek higher yields (cash rates in the developed world are almost zero), while the trouble-free elections and the steady hand of Trevor Manuel have provided comfort.

This affords SA investors an opportunity to lock in some overseas currency exposure without taking a decline in yield. More importantly, they will be diversifying away from their local market at a time when global share prices are still fairly depressed and are likely to benefit from an earlier economic recovery than is expected in the domestic arena.

In the wake of the financial crisis, money has flowed from the developed world to emerging markets in a search for yield. Once the effects of the economic slowdown take hold in the emerging countries, those funds are likely flow back to the first world. The hunt for value will raise demand for the highly discounted mega-cap stocks, which would result in their rerating. Investors who can tolerate interim volatility are likely to be rewarded.

The last six months have been punctuated by sporadic rallies and falls on global equity markets. The second quarter has kicked off with the S&P 500 venturing once again into positive territory, a move that several months ago would have seemed impossible. This can be attributed to positive signs in the US housing sector and increasing optimism about the banks.

It is far better for an investor to purchase at the bottom and watch the eventual stabilisation of an asset class than to watch prices fall from an already overpriced high. While it is difficult to call the exact turning point, risk is mitigated by investing in a broad spread of companies with a global perspective in key sectors.

April saw a considerable rise in capital flows into global equities resulting in very strong returns, especially relative to cash and inflation. Against this backdrop, although the main economies continue to shrink, the rate of decline has eased and, combined with a significant number of companies reporting better than expected profits, there are now the ingredients of a new ‘bull’ market in the making.

Indeed taking the definition of a ‘bull’ market being a 20% rally from the lows, there is perhaps a strong argument that the tide has now officially turned and it is only a matter of time before economic data confirms an economic recovery in the first world is underway. Consensus indicates that it could take up to 18 months for this to reflect in the data, but bull market conditions could quickly return once this occurs.

The best offshore opportunities at the moment are mega cap equities and the Marriott International Growth Fund and Marriott First World Equity Funds display a global array of these mega cap stocks. We also favour defensive sectors, including Energy, Utilities, Tobacco and Telecoms.

In keeping with Marriott’s long term investment view, we expect to see positive results over a medium to long-term horizon as these counters move back into positive territory and as dividend growth resumes.