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Emerging markets lift off

Swimming with the dolphins and stock market returns.
It might be time for local investors to start brushing up on their knowledge of emerging market funds and indices, says the author. Picture: Andrey Rudakov/Bloomberg

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 for ideas and suggestions.

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For those who were panicked by Mr Heystek’s last few articles and took all their money offshore. Big mistake. We now watch [unbelievably] as the JSE powers to new high after new high (as the SP500 perhaps stalls). Its a pitty his earlier articles did not advise sitting tight with emerging markets.

The Observer – you’re confusing ZAR returns with USD returns. Over the last 2yrs, the JSE has returned 7% per annum in USD but over the last 3yrs, 5yrs and 10yrs, it has returned 0%.

And I think you are confusing ”US Dollar” returns as one needs to buy foreign currency and sell ZAR in order to invest in foreign currencies. It is not a zero sum game as you need to repatriate the currency proceeds buy selling it and buying ZAR.

Anybody that bought US Dollars during the last two years and sold ZAR, lost a a lot of money on the exchange rate and the offshore investment, the moment the aforesaid transaction takes place, and then and only then can a true comparison be made between local against offshore investment, in rand terms!

It is interesting to note that by reading Moneyweb, we also exhibit a characteristic of dolphins. Dolphins “see” with the use of echolocation or sonar. They form an image from the sonar waves that bounce off an object in murky waters. When there is danger, a shark for instance, they form a tight group and get a much clearer picture of the object, as the sonar emitted by each one in the group “enhances” the picture for everyone.

By reading Moneyweb, and commenting on the topics, we form a better picture of the opportunities and dangers hidden in the murky waters of investments.

Now I deserve a sardine for this comment!

Reply to The Observer: you obviously have not been observing the markets very carefully, nor my articles.
I have been writing about the superior performance of offshore markets for 6 years now. The returns on my offshore investments have been double and in some cases treble what I would have earned had I not taken my assets offshore.
Even with the JSE at “record levels” have offshore investments still beaten the JSE over 6 months, one, three and five years.

diversify is the story – not chase…

I agree with Magnus – hope things improve in ZAR, but if they do it’s gonna take a long time.
Dunno whether we are ”the land of lost opportunities”
or ”the planet of the apes”

The ZAR is going nowhere from here – the box range of USD/ZAR 12.50 to 13.50 was established at the ”worst financial and monetary period”, post 1994 that we have seen.
( Zuptagate, Kebblegate, Investecgate, Guptagate, Junkstatusgate etc.)
During this time billions of ‘’stork-money’’ left the ”rainbow nation”and the ZAR stood strong.

In my trading days, the banker in most dealer’s pack was the 10-year German bond, that yielded 10 percent from approximately 1981 onwards. It is currently yielding almost 0 percent…

I think most of our old timers that reached our dealing sell by date, will tell you that yield – the time value of money is king and the only thing that dealers look for and chase every day.
Sunny SA is still the most popular ”emerging market” destination, with it very liquid and well-regulated market.

Our Bond yield – carry trades etc will only get better if we can rid ourselves of all the ”shocks and scares” – when we change the management in the Union Buildings in 2018 —my prediction is still USD/ZAR 10.00 within the next 12-18 months!

Bring back some of your off-shore investments – while you can – on average the exchange rate are going to ”eat up your profits” , methinks!

ZAR will never ever trade at R10/USD!! SA is an absolute lost cause!!! It’s very own citizens don’t give a damn about their country!!!

Welcome to NO HOPE COUNTRY!!!!

I will bet you it will – a box of Yellow Smarties – if you want to!

+ask me I know

You are missing the “endgame” in your equation. Fiefdom.

Zuma(feline)2 will be the next president, the rot will continue on SOE’s and the rating agencies will not improve their ratings in your time frame.

I hope you are right but “and if there is doubt, there is no doubt”. The rand will not see it glory days of >10 to $

Our prophet of doom is now encouraging swimming with dolphins- which is equivalent to feeding the monkeys- humans and nature should not mix in such a way as it promotes unhealthy behavior (kind of like lion encounters).

Not only does he want to disrupt the financial Illuminati; he now wants to promote the profiteering of mans selfish bribing of animals that dont care about you swimming with them- and care more about the chum buckets feeding them…

End of comments.



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