File Image: IOL
File Image: IOL

Active managers better placed to navigate a low-growth economy

By Martin Hesse Time of article published Apr 1, 2019

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A downswing into a recession within the next year is unlikely, but global growth going forward is likely to be slower and active fund managers who can filter out stock market noise and focus on the careful selection of quality assets are in a strong position to secure solid returns in global markets.

This was the general view of international investment experts at Glacier International’s Seminar 2019, held recently in centres around the country.

Luke McMahon, a research and investment analyst at Glacier by Sanlam, said market volatility, after being low in 2017, had returned “with a bang” in 2018 and global equities had their worst year since the 2008 financial crisis. Factors that caused fear in markets were mainly economic, he said.

The US Federal Reserve Bank took a “hawkish” stance on its policy of normalising interest rates and central banks globally moved from quantitative easy to quantitative tightening, “effectively sucking cheap liquidity out of the markets”. There was political uncertainty on Brexit. And in the last quarter of 2018, global growth projections by the International Monetary Fund and the World Bank were revised downwards.

But 2019 may be seeing something of a recovery, McMahon said, with lower prices offering buying opportunities for savvy investors.

There were still real risks in offshore investing, and financial advisers needed to pay attention to the clients’ risk profiles, the management of investment risk through active fund management, diversification across asset classes, regions and investment styles, and the need for investors to remain focused on their long-term objectives.

Neil Padoa, the head of global developed markets research at Coronation Fund Managers, said that looking ahead over the next five to 10 years, it was reasonable to assume there would be a recession, and “this is cathartic”.

He said that although many equity fund managers may be “bottom-up” investors, focusing on individual companies, from a multi-asset perspective one needed to take account of the bigger picture.

Padoa outlined three main areas of risk on the macroeconomic front:

1. Abnormally low interest rates. Although there had been small hikes in the US, “we are very far away from normalisation” so investors could have had their behaviour conditioned over the last 10 years into believing the current situation was normal. Also, the abnormal rates had distorted asset prices, Padoa said.

2. High debt levels around the world. Since the financial crisis, there had been little deleveraging, encouraged by low rates, Padoa said. While bank and household debt might have declined, corporate and government debt had soared owing to very low interest rates.

3. The rise of inequality, which is driving populism. In the US, the top 0.1% of the population is worth the same as the bottom 90%. Inequality has not been this extreme in many decades.

Ian Beatty, the co-chief investment officer of NS Partners, countered that while inequality may have increased in developed countries, globally the situation had “improved dramatically”.

The rise of economies such as India and China had seen vast numbers of people being lifted out of poverty, he said.

On investing in emerging markets, Beatty said that while these economies had little in common and it was difficult to generalise, they had gone through a period of under-performance, and share valuations offered good value currently relative to other markets. So the question was whether emerging markets had reached the bottom of their cycle, “because upswings can be quite powerful”. Some, such as those in south-east Asia, would respond positively to less liquidity in global markets and a lower dollar, while others, such as Mexico and South Africa, were more sensitive to what happened in the US.

It might be difficult to predict short-term outcomes, Beatty said, but the structural changes in some of the larger emerging market countries provided a compelling long-term case for investors.

He said that if you looked at 2000 years of global economic history, the “old giants” of China and India were making a comeback and reclaiming their rightful places in the global marketplace, which had been dominated by the West in recent centuries.

He said we still tended to underestimate China’s rapid economic development and the fact that the buying power of the Chinese population was increasing exponentially. For example, the car market in China was now the biggest in the world. And because China didn’t have the legacy problems that the West had with its fossil-fuel-based automotive industry, it had become the leader in adopting electric cars.

Another industry that was seeing massive growth in China was financial services. Between 2007 and 2017, assets under management grew from $0.8trillion to $18.8trln.


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