While the appetite for global exposure among South African retail investors is undoubtedly on the upswing – fuelled by a combination of rand weakness and a greater need for diversification – many are concerned that several global asset classes currently appear overvalued. The question then begs, where are the pockets of value in the global market for local investors seeking to maximise their rand returns?
Kyle Wales, one of the Boutique Heads of Old Mutual Titan – Old Mutual Investment Group’s new active fundamental global equity boutique – which has 1.3 billion Rand under management, says that even though the market may appear expensive at the moment, opportunities continue to exist within the global equities landscape.
“In terms of geographical pockets of value, we believe that emerging markets are looking cheaper than developed markets and Europe is looking cheaper than the US.”
“However”, he adds, “Just because a market, as a whole, may look overpriced, doesn’t mean there isn’t value to be found in certain, well-chosen stocks. It just means you have to look harder to locate them. This is where taking a bottom-up, valuation-driven approach can prove particularly useful as it focusses at a company-specific level, rather than working down based on a macro-overview.
“Among some of our top stock picks are consumer staples such as Heineken, Mondelez (which owns Cadbury, among other assets) and British American Tobacco. Because these stocks are defensive in nature, they are less sensitive to market sell-offs. This reflects our view that markets are looking quite expensive at the moment.”
Also among Old Mutual Titan’s top picks are four internet stocks – namely Amazon, Google, Facebook and Naspers (to get exposure to the Chinese stock, Tencent). “These provide us with exposure to multi-year secular growth opportunities and two emerging market stocks; these being BB Seguridade (Brazil), Axis Bank (India) which are beneficiaries of improving macroeconomics as well as rising incomes in those countries.”
An important point to remember, he adds, is that where a company is listed – especially in the case of large global holdings – does not necessarily determine the markets to which it has exposure. “Many of these businesses will have operations all over the world. For example, 40% of Mondelez’s (Cadbury’s) operational earnings are derived from emerging markets, even though the stock is listed in the US.”
Wales points out that taking on a bottom-up approach doesn’t mean that stock-specific calls that are made in the Old Mutual global equity UCITS fund aren’t informed by the macroeconomic fundamentals.
Wales concludes that when investing offshore, especially for a South African retail investor, it’s not simply a matter of choosing a market overseas where the relative valuation appears to be more attractive. “It is important to remember that not all valuations are created equal, as there is a risk-adjusted overlay that needs to be applied. A business in Russia, for example, should not command the same valuation as the same business located in the United States.
“While the market exhibits a lot of short-term volatility, economic fundamentals determine how a stock performs as an investment in the long run. This is why we believe investment managers should have informed opinions about the stocks within their portfolio in order to generate good returns for their clients.”