Wealth investors urged to go global
Chris Potgieter, Head of Old Mutual Wealth Private Client Securities.
Could offshore food and agriculture stocks be the answer to minimising local investment risk?
A recent Global Economic Prospects report by the World Bank revealed that South Africa is set for mild improvement in economic growth, however the country continues to lag behind its peers. Despite the positive mood among investors following the election of President Cyril Ramaphosa, the World Bank warns that the country’s average growth rate in comparison to other emerging markets will be significantly lower in 2018 and 2019. Which is why local investors are encouraged to build a globally diversified portfolio to help mitigate local underperformance.
Chris Potgieter, Head of Old Mutual Wealth Private Client Securities says, “while global diversification is the obvious solution here, local investors are currently facing two major risks: low growth and underperformance in local markets, and the concern that global markets are largely overpriced. For this reason, simply diversifying offshore is not going to be sufficient; investors must diversify further through the incorporation of defensive stocks that are priced fairly.”
Unpacking what a defensive stock is, Potgieter explains why adopting a defensive approach can be so useful to investors during uncertain times. “A defensive stock is an equity stock that provides investors with stable earnings regardless of the state of the overall stock market. Because of the constant demand for their products or services, defensive stocks tend to be less cyclical and provide investors with a smoother return.
He adds, “Companies that are involved in the value chain that supports the production and distribution of food are prime examples of defensive stocks because the demand for these products is likely to remain stable over the long-term, regardless of any economic dips.”
Despite their inherently defensive nature, Potgieter says that portfolios focussed on the global food and agriculture value chain do offer opportunity for growth, making them a very attractive option for savvy local investors. “With significant exposure to staple industries, our global food and agriculture model portfolio offers a good balance between defensiveness and growth by investing in a range of companies across the value chain, including those towards the end of the value chain, such as packaging and logistics companies and those involved in food retail”.
“While primary food production enterprises do introduce some cyclicality to the portfolio, investors who are taking a long-term view will likely be able and willing to tolerate this,” he adds.
A significant driver of growth in this sector, according to Potgieter, has been the application of technology in improving the global food and agriculture value chain to decrease operational costs and wastage and to increase outputs. “Technology has played a key role in making the production of food more profitable, more sustainable, and just generally more efficient over the past century; and in our opinion, we have only begun to scratch the surface in terms of what future technological opportunities exist in this regard. This is an exciting field for innovation and investment.”
Potgieter concludes that while the food and agriculture value chain may often get overlooked from an investment perspective, it is a fundamental sector supporting human existence and offers attractive opportunities for investment across the globe. “The fact is that the global population continues to grow, the middle class continues to expand demanding high calorific consumption per person and food security continues to be a global issue. Climate change and a decline in newly available arable land conspire to create a structural supply shortage.
This outlook suggests that the food and agriculture value chain is going to remain a high priority going forward and, as such, the companies that successfully contribute to this value chain represent solid long-term investment opportunities.”
