Laura du Preez | 12 June 2024
Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses.
The world has changed materially over the past decade and your fund manager is probably looking for alternative ways to earn the best returns for you, asset managers told the recent Meet the Managers conference.
The past decade was characterised by globalisation, low inflation and low interest rates.
But the next one is likely to be very different as tensions rise in various regions of the world, the rise of leaders appealing to popular socio-economic issues and election upsets that threaten existing trade relations.
Globalisation has been a trend since the fall of the Berlin Wall and accelerated after China joined the World Trade Organisation in 2001, Sumesh Chetty, a portfolio manager in the quality team at Ninety One, said.
Although it is unlikely to stop, it will slow, he said.
If globalisation slows it means businesses’ supply chains will be less efficient and costs will be passed on to consumers, which will result in higher inflation and ultimately lower growth.
Chetty says interest rates may come down a little from their current highs, but they will not fall as low as they were this past decade making the cost of capital higher for businesses.
Kamini Naidoo, chief investment officer at Equilibrium, the discretionary fund manager in the Momentum Metropolitan Group, says rising geopolitical tensions have led to greater uncertainty around trade policy.
The new trade restrictions have almost tripled as a result of broad financial sanctions and investors are increasingly concerned about deglobalization and the fragmenting of existing trading patterns, she says.
During Donald Trump’s US presidency, China’s share of US imports dropped by eight percentage points and the US share of Chinese imports dropped by four percentage points which had a massive impact on two of the world's largest economies, Naidoo says.
Russia’s invasion of the Ukraine also resulted in direct trade between Russia and the West collapsing. The US and its allies imposed more than 2000 sanctions on Russian corporations, financial institutions and individuals, she says.
Russian hydrocarbon exports have continued with other countries such as China and India, but there is more uncertainty about these new trading relationships, Naidoo says.
Disruptions to shipping in the Red Sea have also impacted global trade. Transportation 
between the East and the West has been rerouted around the Cape increasing average shipping times by 20 days and resulting in higher costs, Thami Khoza, portfolio manager at Equilibrium, said.
The Red Sea disruption could see world trade decline by 1.3 percentage points in 2024 and add between 0.2 and 0.3 percentage points to inflation around the world and in the Eurozone, she said.
Naidoo says the US elections are a key event in the second-half of this year, with the potential to spread uncertainty in global markets as polls suggest that a second Trump 
presidency is likely.
A Trump presidency would increase protective measures for US producers. Trump has already indicated that he would impose tariffs of about 10 percent on all imports into the US and 60 percent on goods coming in from China, Naidoo says.
Economists are concerned about the impact of these trade measures on factors such as economic growth, unemployment and inflation in the US, she says.
Besides heightened geopolitical risks and higher interest rates, share prices relative to their earnings (valuations) are stretched in many popular parts of the global market, Peter Armitage, the chief executive of Anchor Capital, said.
Armitage said there is still a bull market in global equities and bull markets can “have legs” for long periods, but Anchor is starting to feel uncomfortable about when it may end.
Ninety One and Anchor Capital are among many managers who are concerned about how high the share prices of certain global companies have risen.
Both Armitage and Chetty cited the case of US technology company Nvidia. The chipmaker’s shares are trading at more than $1200 and has a market capitalisation of US$2 trillion – putting it only behind Microsoft and Apple on market capitalisation.
Chetty said Nvidia is a great company but Ninety One considered its share price too expensive to be a good investment case when it was trading at $250. Despite this analysis, the share price has continued to rise as investors chase the shares of companies involved in AI and technology.
Armitage says technology companies like Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla, make up nine of the top 20 largest companies in the world.
The top 10 companies account for 30 percent of the S&P500, the index of the top 500 companies listed on the US stock market. This poses a big concentration risk for anyone who invests in line with that index, Chetty said.
The top seven tech companies, known as the Magnificent Seven, have been responsible for driving the returns of the MSCI All Country World Index (ACWI), while investors have ignored other good global businesses, he says. It has been a one-way thematic bet on tech companies, he said.
As the risks in global equity markets are high, Anchor has started selling some of its global equity investments and has invested the gains in offshore money markets where returns are above global inflation at an expected five percent for the year ahead but likely to come down to three percent a year over the longer term, Armitage said.
Although returns from offshore cash are below that of local cash, South African investors benefit from the steady depreciation in the rand, he said.
Chetty said Ninety One is avoiding the risk of investing in expensive global shares by choosing other quality businesses for its global equity fund, the Global Franchise Fund. As a result, the fund’s global portfolio is very different to that of the index and only holds two of the top ten shares in the MSCI ACWI, he said.
Chetty said over the past year to the end of March, 14 percentage points of the 22 percent return on the MSCI ACWI was a result of share prices moving up and only six 
percentage points came from growth in the earnings of the companies represented in the index.
Ninety One’s Global Franchise fund is focussing on shares of companies with more earnings growth – it earned 13 percentage points of its 18 percent return over the same period from this profit growth and only four percentage points changes in the valuation driven by the rising share prices, Chetty said. Ninety One believes this is a more balanced, less risk, way to ensure good returns for investors.
Armitage says Anchor Capital is turning to alternatives to earn higher returns on a small part of a diversified portfolio. Offshore private debt funds offer credit to consumers who do not meet traditional lender requirements and Anchor expects to 
earn around eight percent over the next year from these assets. It is also using hedge funds and other alternative assets with the expectation to earn around 12 percent a year from these assets.
Khoza says Equilibrium is of the view that “the blend is your friend” when it comes to managing the risks – that is, diversify across manager styles, across risk return sources, across geographies and across asset classes, she says.
In this way you can create an insulated portfolio that isn't overly exposed to any single geopolitical shock.
She says the risks in global markets is likely to make them volatile but if your investments have been chosen based on good long-term investment cases, you just need to stay the course when there is short-term volatility.
