Our chance to exploit developed world opportunities – BJM PCS
Instead of being the target of opportunistic forays by value-seeking investors from the developed world, emerging markets – including South Africa – now have a unique chance to reverse the process and exploit bargain basement prices in the UK, USA and Europe.
Unfortunately, the turn of events is so surprising South Africans are in danger of letting the opportunity slip.
The topsy-turvy perspective on value prospects comes from Barnard Jacobs Mellet Private Client Services (BJM PCS), a wealth company focused on wealth creation and preservation for high net worth individuals.
Louis Bekker, head of multi-manager funds at BJM PCS, says many South Africans have fallen into the habit of regarding offshore diversification solely as a means of tapping into emerging market growth. But for over a year, the big long-term value opportunities from a low base have been in the developed world.
He explains: “Look at two-year growth prospects in key emerging markets and you see a 5% annual GDP growth forecast for Brazil, 14.1% for India and 18.4% for China. Investors then assume these are the places to be.
“But go deeper and you start asking yourself if the growth story is not already reflected in the share prices. Our conclusion is that the big value opportunities have often been realised.
“There has been a huge run-up in prices since the emerging market crisis of 1998. If you had taken a 10-year view in 1998 and invested in emerging markets when most investors were heading for the exits, you would have built significant wealth.”
Today’s strategic investment challenge, according to BJM PCS, is accurate identification of the next big 10-year opportunity.
This has prompted BJM PCS multi-management to explore embattled UK and USA markets; including one of the most shunned sectors of the last 18 months – banking.
“Comparisons with banking counters from emerging Asia are an eye-opener,” says Bekker. “The shares of one large Asian bank were trading at four times the institution’s net asset value (NAV).
“If you look at one major British bank, its shares were at 3.5 NAV in the boom years of 2005 and 2006, only to plunge to a little over NAV by the end of 2008. These shares are still way below the long-term average of about twice NAV.
“Yet this is a relatively strong British institution with a strong brand.”
A similar picture was discovered when examining value opportunities among American financials. One major institution had seen its return on assets (ROA) fall below 5% in 2008 and enter negative territory in 2009. Yet ROA was projected to reach 25% by 2011 – though these expectations had yet to have significant effect on the share price.
Bekker adds: “We have been alerting clients to these opportunities for some time. We also highlight bargains within the British property market as property tends to be late to respond to so-called green shoots of recovery. This gives you a little longer to exploit growth potential.
“In the main, South African investors have been slow to respond, despite the added incentive created by the strong rand. It’s as though they can’t believe their luck or that bargain-hunting is something the Americans and British do in our markets and we’re not supposed to do the same in theirs. But we can … and perhaps we should.”
