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How the world’s largest investors are positioning their portfolios: Jeremy Gardiner – director, Investec Asset Management

‘You are going to see riots across Europe.’


THEO VORSTER: It’s my pleasure to welcome Jeremy Gardiner, director, Investec Asset Management. Jeremy, good afternoon.

JEREMY GARDINER: Good afternoon, Theo.

THEO VORSTER: Jeremy, today you presented a view on how you see the world and, if I look at it carefully, probably the key note I got from that is that we are seeing a shift from the low-yielding West to the higher growth rest of the world. You call this a developed market crisis, or developed world crisis. What do you mean by that?

JEREMY GARDINER: Ja, if one watched CNN or Sky News during the crisis, you got the impression that this is a global financial crisis. It wasn’t at all. It was a developed market, Western world crisis. The rest of the world, Asia, South America, weren’t that affected at all. So I think what you are seeing at the moment is you are seeing different parts of the world recovering a lot faster than others. And unfortunately the Western world has lived beyond their means, they’ve taken on too much debt and they are going to have a rough time for a long time to come – probably the next two, three, five maybe even ten years.

THEO VORSTER: Well, to fix that they’ve got this risk of higher taxes, cut government spending. And if you put that into context, for the last ten years US equity investors have barely shown returns.

JEREMY GARDINER: Ja. That is the most amazing thing, that at the end of the nineties all the people wanted you to do was to put their money into American stock markets or into the dollar. And for the first ten years, 2000 to 2010, the American stock market did nothing, nothing. Now they are faced with this awful situation where they’ve got to raise taxes, where they’ve got to cut people’s salaries, and it’s going to be very unpopular. You are going to see riots across Europe. I was in London last week and someone was going on about our public servants’ strike. I said: “You have seen nothing yet, because in Britain and in Europe you are going to see massive, massive strikes as these austerity programmes kick in, and they are not going to be pretty.”

THEO VORSTER: Jeremy, what does this mean for local investors?

JEREMY GARDINER: I think for local investors you’ve got a difficult situation going on at the moment. The rand is rampant, but therein lies an opportunity as well. If you haven’t taken money offshore, now is not a bad time to do so if you are trying to internationalise a portion of your portfolio. What do we do as a country? Difficult to say. There is not much we can do about the strong rand. We could lower interest rates, so I think you are probably going to see another 0.5% decrease. That’ll to an extent remove people coming to us for yield, but not much. We’d need to go further than that. We could liberalise exchange controls a bit more – that would help a bit. The central bank could intervene – they’ve been doing that, but it is an expensive way of doping it, where you buy dollars and sell the rand. Or we could take capital flows – that’s what Brazil did. Bit that’s also not really a solution because you hurt your investors, because asset prices take a knock, and it doesn’t really work either. So it’s largely beyond our control. South African investors – I think you’ve just got to stay diversified.

THEO VORSTER: Jeremy, it’s almost like because of a lack of alternatives you have to look at equities.

JEREMY GARDINER: I think you do have to. Globally interest rates are going to stay low for longer. Every central banker is terrified of pushing his country, by being too tough, back into recession. So they are going to keep interest rates lower for longer, which means that cash is not going to yield great returns. Bonds, particularly in South Africa, will yield a return, but it’s not going to be very exciting. So I think investors are going to find themselves back in equities largely through a lack of options. When you say equities, difficult to say which ones. We spend a lot of time with the world’s big sovereign funds, the world’s big pension funds, and they almost without exception say to us that they have been punished heavily by being skewed towards developed markets. So you’ve got this massive shift now moving into emerging markets out of developed markets at the moment, and that’s part of the reason once again why the South African market has been strong and why the South African currency is so strong.

THEO VORSTER: Jeremy, lastly, obviously this is not the end of America, it’s not the end of the dollar. But if we get back to more of a normal kind of situation, broadly speaking, what would that look like?

JEREMY GARDINER: You are quite right, it’s by no means the end of the dollar. America will come storming back at some stage, as will the dollar, but you are going to find it will be in a different world where they are not going to be the world’s only superpower and the dollar isn’t going to be the world’s reserve currency. So you are going to get a far more equitable spread of capital going forward, which is not a bad thing.

THEO VORSTER: Jeremy, thank you very much. Jeremy Gardiner, director, Investec Asset Management.

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