Glen Finegan and Ian Tabberer, respectively Head of and Portfolio Manager on the Global Emerging Market Equities Team, believe that South Africa offers compelling long-term opportunities for investors focused on valuation.
What are the key themes likely to shape markets in 2019?
We think a year is a very short time within the lifespan of an investor and believe in maintaining a long-term investment time horizon of at least five years when assessing the value of companies. One of the key things we are interested in is long-term demographics and how they are going to affect global emerging markets. According to the United Nations China is likely to have an ageing population, with the number of people over the age of 65 expected to triple by 2050 to approximately 330 million. We think this is likely to challenge the growth opportunities in China. This compares to what we see as a positive demographic opportunity in Africa, where the overall population is expected to double over the same time period that China is going to be facing challenges. This is a key long-term theme that we are looking to take advantage of for our portfolios.
Where do you see the most important opportunities and risks within your asset class?
For a long time we have been highlighting that valuations for businesses and stocks within Asia look expensive due to the level of optimism and businesses that have performed well recently. Our focus is on companies for which we think the opportunities have been less-highly valued by the market. We have been shying away from those stocks that are related to the Indian consumer. These are often high-quality businesses with a great long-term opportunity but the valuations appear very high. For some Indian consumer staples companies an investor would in effect have to pay more than half a century’s worth of earnings to invest at current valuations. In comparison, there are businesses with similar growth prospects in South Africa at a lot lower valuations so we think that is an attractive place for us to invest over the long term.
How have your experiences in 2018 shifted your approach or outlook for 2019?
The market experience with regards to currency mismatches for global emerging market (GEM) stocks reminds us once again of the importance of investing in businesses that are very conservatively managed. We look to invest alongside management teams that are aligned with our own long-term interests. With very low interest rates in developed markets a number of GEM corporate managements teams appear to have taken on significant levels of currency risk, borrowing money in foreign currencies at a low interest rate and effectively making a ‘bet’ on the rise or fall of the exchange rate. We do not believe this adds to the strength of a business but it reminds us of the importance of investing alongside cautious, sensible management teams that do not take on undue risks.
Which themes have the potential to redirect markets in 2019? Download our Infographic to find out
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