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Johannesburg - South African investors seeking superior returns over the next five years need to have exposure to China and the rest of Africa.
That's according to Alex Pestana, investment strategist at Sanlam Investment Management (SIM) who spoke to Fin24.com on Wednesday.
"Over the next five years, China is going to be absolutely core to South African investor portfolios," said Pestana.
He said that emerging markets as a whole looked more attractive than developed ones, but places like China and the rest of Africa offered better potential returns than places like Brazil.
Brazil is very closely correlated to the South African market, said Pestana. Due to its large exposure to resources, it would not necessarily offer sufficient diversification for local investors.
Pestana believes other African markets offer good returns, supported by China's aggressive expansion into sectors such as agricultural and resources.
"China saw the opportunities early on and has thundered into Africa," he said.
A growing number of local asset managers have added funds with exposure to other African markets to their product mix.
Challenges remain
Despite opportunities in Africa and China, the investment environment remains uncertain, with a number of threats to sustainable global growth - including the prospect of a jobless economic recovery.
While markets have made up lost ground since tumbling in late 2008, the US is flirting with unemployment levels tipped to reach 13% over the next few quarters while South Africa has real unemployment above the 25% mark. Jobs have been shed as the recession has taken its toll on companies looking to cut costs.
"Ultimately, if unemployment doesn't pick up then in the longer term we can expect a pretty tepid economic recovery," Pestana said.
Asked how equity markets managed to shake off the fears of 2008 and early 2009 so quickly, Pestana said US investors are seeing so little return on their cash in the bank that they are forced to seek out other asset classes, including shares.
Of major concern to SIM is the treat of deflation, particularly if stimulus packages are withdrawn from the market too early.
Pestana said: "Authorities fear entrenched deflation more than they do inflation. However, there are indications from monetary authorities that monetary easing will be removed as soon as clear signs of economic stabilisation emerge. This will greatly impact consumers and financial markets."
- Fin24.com
