One of the joys of spending some time in the Black River area of Mauritius is the great abundance of dolphins, which come into the bay every morning to feed and frolic at a leisurely pace.
It is therefore no surprise then that a very substantial micro industry has sprung up in this South Western area of Mauritius, in and around the beautiful town of Tamarina, which offers swimming-with-dolphins-cruises for hundreds of people every morning.
People travel from all over the island to see and perhaps swim with either bottlenose or spinner dolphins, the smaller types.
It’s the equivalent of seeing one of the Big Five at an African game farm and is a thing of joy and beauty.
There is no guarantee that you will see or swim with the dolphins; much depends on the weather and on a cloudy and overcast day your chances dwindle considerably. Some days you strike out completely.
Other days, like last week during a much-too-short sojourn to La Balise Marina at the mouth of the Black River, you strike gold. Not one, but two schools of dolphins within sight of each other! Unhurried and completely relaxed they offered the very rare opportunity to swim with the dolphins for an extended period of time.
But even in their relaxed mode it is difficult to pinpoint exactly what the school will do next. Will it go left or right? Will it ever surface again? Where shall we head to await their next appearance?
This unpredictable behaviour of dolphins got me thinking about stock markets and the great massive global flows of money, which sometimes are just as difficult and unpredictable to forecast.
Get it right and you strike gold. Get it wrong and, well, you stay wrong and you see someone else in the distance swimming with the dolphins with great shrieks of joy.
Do you scramble onto deck in order to chase after the dolphins or simply plot your next strategic positioning?
The great rotation
Perhaps, and just perhaps, we have been experiencing a sudden change in the flow and direction of global capital. A great rotation as the greybeards, long in this business often call it.
Such sudden changes in the flow of global capital does not come with bells ringing, press releases and confident forecasts. Rather, very much like a school of dolphins, it just happens. You only pinpoint the great turning point much later.
For some weeks now there have been signs, initially very faintly, that we might be experiencing such a great rotation: a small but growing switch in the allocation of capital from the developed markets back into emerging markets, of which South Africa, thankfully, is one of them.
It is a well-established fact that over the last five years or so it has been a developed market story as far as equity markets were concerned. Developed markets have massively outperformed emerging markets over this period time, with the US leading the pack by far. Over five years to the S&P 500 produced a return of 190% versus a return of only 97.3% over the same time, with SA lagging even more, with a cumulative return of 83%.
Over the last couple of months there seems to have been (a) a stalling in the flow of momentum-driven capital into developed markets and (b) a sea-change in the approach to emerging and even frontier markets.
Ignore these big swings in global capital at your peril.
It also explains, to a certain extent, the sudden upward lift in our long-suffering market, after nearly three years of sideways movement.
It’s not as if South Africa has suddenly become the darling of the investment world again. Far from it: capital is flowing into South Africa despite the poor economic outlook. Index trackers have to allocate capital to SA, which remains a key constituent of the MSCI Global Emerging Markets Index but they have been doing this reluctantly. The SA market, even though it is looking much perkier in recent weeks, is badly lagging the MSCI Emerging Market Index by a substantial margin (see chart below).
This underperformance seems to have started soon after the Nenegate saga in December 2015. Since then the performance of emerging markets has streaked away from the performance of the local market.
South African investors wishing to get exposure to emerging markets excluding South Africa have very limited choice.
Fortunately one of the few locally-managed funds that gives investors exposure to emerging markets is the Coronation Flexible Emerging Markets Fund. Not only is it available on all local platforms but it has outperformed both the SA market as well as its benchmark by a substantial margin.
It provides local investors with a managed exposure to emerging markets which might offer better growth opportunities than South Africa does.
Fund manager Gavin Joubert is particularly optimistic about the retail sector in Russia (much cheaper than in SA), education in Brazil and banking in India. It might be time for local investors to start brushing up on their knowledge of emerging market funds and indices. It’s not always a binary story in investment markets; SA or the US/developed markets, as some investors seem to think. Other parts of the world are also starting to show some exciting early-mover developments, and on spotting such an early move great fortunes can be made. Very much like anticipating the next movement of the dolphins….
Frontier markets too are also starting to attract some flows from expensive developed markets. More about that in a following column.
Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached on firstname.lastname@example.org for ideas and suggestions.