Keep an eye on these three investment themes | Fin24
 
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Keep an eye on these three investment themes

Oct 24 2018 14:29
Schalk Louw

Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)

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Flying back home recently from OR Tambo International Airport, I couldn’t help but notice that by putting some distance between ourselves and the earth below, we get to see things from a completely different perspective. 

On the ground, everything seems to be moving constantly, but as the airplane goes higher and higher, the movement and the noise below becomes less and less. Eventually, all goes quiet and you can only see the broad outline below. 

This may sound quite philosophical, but I often take this approach when analysing investments. 

When we have TV news yammering in the background while watching a screen full of live prices, we tend to lose perspective. And this can lead to poor investment decisions. 

I want to take a look at three themes and statistics that are currently making quite a bit of noise in the background:

1) Chinese internet companies vs. US internet companies

I think most of you will agree that the internet equity sector has definitely been one of the best investment options over the past three years. 

Since October 2015, both Chinese (KraneShares CSI China Internet ETF) and US internet companies (First Trust Dow Jones Internet Index ETF) have grown by more than 90% in US-dollar terms. 

This trend, however, started to take a turn in the opposite direction in 2018. 

Chinese internet companies were terrorised by strict regulations and a trade war with the US, which caused Chinese internet companies in total to grow by only 27% in three years in US-dollar terms up to 12 October 2018. 

Why do I use the word, “only”, if this clearly is still exceptional growth? 

Well, because their US counterparts grew by 74% over the same period. 

Very briefly, Chinese internet companies’ growth declined by 25% in dollar terms, while US internet companies managed to grow by 17% in the same environment. 

If South African investors are wondering why this is significant locally, the answer is, of course, Naspers*. 

Tencent is the largest Chinese internet company, and also the company that makes up the largest portion of Naspers. 

For those of you who still feel that the internet company theme remains a good investment over the long term and that the butchering of Chinese internet companies is just an overreaction, these two companies can definitely be considered. 

But be warned: Any investment that can grow by 90% in a relatively short period, and decline by 25% in an even shorter period, can (and probably will) place you and your emotions on a very wild rollercoaster ride. 

2) Global technology – will this time be different?

Needless to say that the circumstances (and valuations) were different back then, but we have had a global technology bubble before, and it popped with a bang. 

The fact remains that global tech companies (iShares Global Tech EFT) have grown by a whopping 64% in  dollar terms over the last three years – in the same environment where the MSCI All World Index (iShares MSCI SCWI ETF) grew by only 20% over the same period. 

We have all seen the advances in technology over the years (smartphones, smart cars and new payment methods when purchasing something), but I have to wonder whether this is enough to justify the three-fold growth that global shares have experienced. 

I would recommend taking another look at your investment portfolio to make sure that this sector doesn’t take up too much space in your total portfolio – just in case history happens to repeat itself.

3) Did emerging markets really perform that badly?

At -16% growth for 2018 (Vanguard FTSE Emerging Markets ETF) until 12 October, the short answer is a definite yes. 

But we need to view this in context. When compared to developed countries’ growth of -10% (Vanguard FTSE Developed Markets ETF), it doesn’t look too bad, leaving the total growth between these markets pretty much the same over the last three years. 

Investors should remember, however, that emerging markets have historically shown faster growth than the more established developed markets and this sharp decline since the beginning of 2018 has definitely grabbed the attention of many investors. 

Again, I have to warn investors that (no different to Chinese internet companies), emerging markets definitely carry more risks when compared to developed markets, so always consult an expert before you make a definite decision.

 
Graph 1
  

Graph 1: Chinese internet companies vs. US internet companies (source: KraneShares & First Trust)

Graph 2

Graph 2: Global tech companies vs. MSCI ACWI (Source: iShares)

Graph 3

Graph 3: Developed markets vs. Emerging markets (source: Vanguard)

*finweek is a publication of Media24, a subsidiary of Naspers. 

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