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Developed vs emerging market investment

Aug 17 2015 20:24
Carin Smith

Cape Town - While emerging market (EM) growth has slipped, developed markets (DMs) are now showing a slight rebound, according to Herman van Papendorp, MMI Investments head of asset allocation.

Because of this he would currently favour global equities over global fixed income in portfolios, and equities in developed markets over those in emerging markets.

"EM growth used to be 8% a few years back and is now about 5%. In contrast, in the DM world there is a bit of a rebound. There is, therefore, a convergence between EM growth and DM growth starting to underpin the outperformance of DM over EM equities," he explained at an overview of the local and global macroeconomic outlook.

READ: SA among 'threatened three' emerging markets

Van Papendorp views a strong dollar as likely to further underpin outperformance of DM over EM equities.

"From a valuation point of view, US equities are not looking so great. Own in the US, but not aggressively. We would rather want to favour equities in the eurozone and Japan," he said.

"Japan is doing a lot of reforms that will underpin share performance. Japan’s fundamentals are improving – and return on equity in Japan has, therefore, begun to move up."

In SA he would be underweight on investments in bonds and listed property, but at the same time believes cash is not a bad asset class in SA over the next few months.

As for the domestic market, Van Papendorp said on valuation one probably would not want to over-own SA equities as they are not cheap and are trading close to historic highs.

"SA equities are also expensive compared to other EM markets. We are now getting less dividend yield than normal in SA compared to EM.

"If we look at risk return there is, therefore, likely downside risk, but in our base case we see around 10% SA equity returns in the next year. So, it is expensive, but you can still make decent returns," he said.

Comparing SA equities to SA fixed income, Van Papendorp said South Africa does not look too bad, with equities offering fair to cheap value versus bonds.

Turning to local listed property, he said at present it is expensive compared to SA bonds, so to go overweight on SA-listed property at this stage would be "risky in a portfolio".

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