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Siboniso Nxumalo, joint head of Old Mutual Investment Group’s Global Emerging Markets boutique, put forth a good argument in October for continued investment in select emerging-market (EM) funds.
The essence of his message was that while several leading EMs have been shaken by political uncertainty, corruption, money laundering, racketeering and major downgrades in recent years, they’ve also offered excellent pockets of value.
I don’t disagree with him.
Nxumalo specifically cited Brazil and noted that EMs have generally outperformed developed markets over the longer term.
One related concern I have, however, is a potentially dangerous supposition that if several EMs have made dramatic comebacks, South Africa ought to be able to do the same.
I’m not so sure. In fact, I’ll believe it when, like Brazil and South Korea, SA’s rogue leaders and their cohorts have been tried, prosecuted and received their just desserts.
Nor do I necessarily believe that impeachment at the top would solve our problems.
On the contrary, it could usher in a period of continued instability that will make them worse.
The crisis facing us is a political one, not necessarily a failure of our institutions. The South African Reserve Bank and judiciary, for instance, have been superb.
In any other level-headed parliamentary democracy, the president would have been brought down overwhelmingly by a no-confidence debate, or would have resigned, as Iceland’s prime minister honourably did last year.
Yet our president has gritted his teeth and consolidated his grip on power.
My concern furthermore is the toxic fallout that could follow after 2017, masked as “radical transformation”.
In Brazil’s recent populist experience, economic growth reversed from 7.5% in 2010 to a contraction of 3.6% last year.
It was long one of the fastest-growing EM economies in the world.
In spite of all its positives, Brazil is still finding it extremely hard to recover and expects a growth rate of a mere 0.5% this year.
The optimists anticipate that if Cyril Ramaphosa takes the reins of power, capitalism will take hold once more and the JSE will take off.
That certainly happened in Brazil’s case, where inflation is falling, interest rates have been lowered and financial conditions have eased.
R100 invested in the Brazil bovespa in January last year would be worth about R244 today.
But if, say, the Zuma faction’s preferred candidate, Nkosazana Dlamini Zuma, takes control of the ANC, the outcome may be very different.
Not only might she be seen to be carrying much of her ex-husband’s baggage, but business and consumer confidence levels are likely to recede further, real private investment will continue to drop, and we could be plunged into a serious recession again.
Large numbers of SA’s international clients will hold back on making investment decisions until they are certain of dramatic change for the good.
And while fiscal adjustment is the mother of reforms, higher taxes will not necessarily be the answer to fiscal slippage.
Knowing both Brazil and Argentina reasonably well, my worst fear is that we could fall into an Argentinian populism (Peronist) type trap.
Latin America’s second-biggest economy, it convulsed for almost two decades under what were described as non-sensical policies, gross economic mismanagement and serious corruption.
Two years ago centrist businessman Mauricio Macri was elected president, but he inherited an impossible situation. Argentina faced serious stagflation, 40% inflation and major hits on industrial output, exports and consumer confidence.
No other country in Latin America, save Venezuela, faced worse inflation.
Macri’s focus naturally has been to restore his country’s economy to some semblance of prudence, including reform of fiscal, tax, labour and capital market laws, with the aim of making it more competitive.
The bottom line for unit trust investors domestically is clearly to await the outcome of the upcoming ANC conference, and then make their broad pickings.
If the outcome is favourable, invest across the board in SA Inc.
If it appears to be disaster territory, opt for the best available offshore funds, which indeed could include excellent EM funds such as the Coronation Global EM Flexible Fund and the Old Mutual Global EM Fund.
Both would admirably serve as proxies for a better SA.
They’re managed in such a way as to deliver the best possible returns over the long term. An investment horizon of 10 years or more is ideal.
The Coronation Fund has delivered an annualised 15.9% and the Old Mutual Fund an annualised 15.8% over the last five years (as at 31 October).
The country allocations of both are similar, clearly based on the MSCI Emerging Market Index. In Coronation’s case, leading countries are China (18.78%), SA (18.33%), India (11.79%), Brazil (10.8%), and Russia (9.94%).
It’s had 57.6% positive months since inception; the maximum annual return has been 49.7%, and the lowest annual return -37.5%.
Principal holdings in both portfolios include home favourite Naspers*, Brazil’s Kroton and Russia’s Magnit. Kroton is one of the world’s largest education companies with more than 1.9m students and revenue of $419m in the third quarter.
Magnit is Russia’s biggest food retailer with 2 495 locations and quarterly revenue of $4.5bn.
*finweek is a publication of Media24, a subsidiary of Naspers.
This article is part of the December 2017 FundFocus survey, which appeared in the 30 November edition of finweek. Buy and download the magazine here.
