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What does the FIFA World Cup tell us about the world and global investment?

Jul 11 2018 11:25
THOUGHT LEADERSHIP

By Peter Brooke, Fund Manager, Old Mutual Investment Group

Donald Trump’s policy of tax cuts and trade wars has driven the US dollar stronger and caused chaos in emerging markets. Despite South Africa’s improved political outlook we have fallen victim to this reduction in risk, with the rand and our bonds weakening. It can be scary having your investments driven by a twitter account, so it is critical to maintain perspective.

Travel is fantastic for this, as it allows you to see the world in a fresh light. I was very fortunate to get tickets to the opening game of the FIFA World Cup in Moscow. The Russian hosts are experts at getting along without the US, as a result of the cold war and more recently sanctions. And they are getting along just fine with a sea of cranes on the sky-line. Russia has a current account surplus, a budget surplus and government debt of 15% of GDP. This contrasts with the US with a current account deficit, a budget deficit of 4.6% of GDP and debt of more than 100% of GDP.

Saudi Arabia clearly didn’t do very well in the soccer, but that didn’t dampen their fans’ enthusiasm for the country’s reform program. Saudi Arabia has just been promoted into the emerging market universe and is working hard to transform their carbon dependency. Sitting in the stadium, the rise of emerging markets was obvious from the advertising billboards: Hyundai from Korea, Wanda from China, Qatar Airways and even an Invest in Egypt thrown in. The fans were from every corner of the world, but the big crowds were from Asia and Latin America, with a surprisingly large number of Peruvians. This represents the growth in spending power of the emerging middle class.

So, in terms of the ultimate World cup victors, if England beats Croatia, does that tell us who is going to win the tournament? We don’t believe in forecasting, but we do believe that decent macro analysis can provide a guide to the future. The US is currently boosting growth through aggressive tax cuts and as a result, their economy looks fantastic. However, as we all know in our personal capacities, spending more than you earn can be fun in the short term, but you will pay for it in the long run. Faster growth will lead to higher interest rates and when the sugar rush ends we will want to be investing in emerging markets and not in the US.

We already have a small exposure to emerging markets across our range of solutions and will buy more. But our biggest emerging market exposure, of course, is our South African holdings. We are excited by the sell-off in South African bonds, which are now yielding more than 9%. This means a real return of more than 3% which is good news for future returns. We have added some of these bonds to our portfolios.

The one forecast I would have offered is that the US would do badly this World Cup – that is if they had qualified. Ultimately, my suggestion is don’t waste time following Donald Trump’s twitter account and rather use the time to watch some soccer. There is a world of opportunities out there and as investors, we continue to strive to find them in order to deliver our expected returns.

finance  |  donald trump  |  world cup 2018  |  old mutual

 
 
 
 

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