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Local or offshore equities?

Selecting well-capitalised good quality stocks at reasonable prices is likely to be a good strategy.

The key question that remains on investors’ minds is how long it will take for Covid-19 to be contained and what is priced into assets.

We point out upfront that it is inherently challenging to quantify the economic and financial market impact of major unexpected shocks, such as the current Covid-19 outbreak. Our view nonetheless is that global authorities have done the right thing in implementing unprecedented monetary and fiscal policy measures that are aimed at offsetting some of the economic damage caused by the pandemic-driven economic lockdowns and to shore up liquidity in funding markets.

Global equity markets have responded strongly to these stimulus measures, as well as early moves to gradually re-open economies, while mid-term economic indicators remain quite depressed.

Unfortunately all the stimulus efforts will not do much to drive a recovery in the global economy for as long as people are not free to move and trade. Financial markets normally look forward a couple of quarters ahead of current economic data and are likely pricing in an economic recovery from 2021.

It is therefore the right time to question if the economy is likely to be the disappointment factor to the current sharp recovery in global financial markets so far. We think that James Bullard, the president of the Federal Reserve Bank of St. Louis, summed it very well in a recent speech: “The shutdown can’t go on forever because if it does, deep into the second half, then I think you risk getting into a financial crisis or even a depression scenario….  And if you get into that I think even health outcomes would be way worse.”

Yes, visibility is currently very low in the global economy and, in turn, global financial markets that are supposed to follow wealth creation over the long term, but investors have to keep investing

…and very uncertain times such as this one may actually present huge investment opportunities.

We believe how to approach investments in this environment depends very much on one’s circumstance and time horizon. Short-term traders and those investing for short-term goals have to be extra careful given the potential for the global economy to disappoint over the next 12 months, while long-term investors have the opportunity to acquire high quality assets at reasonable valuations in certain segments of the market.

The situation in South Africa

There is no doubt that the combined impact of weaker global growth, Covid-19, weaker South Africa government finances and the Eskom electricity supply constraints will present unprecedented challenges to the South African economy over at least the next 12 to 18 months. However our analysis shows that the JSE equity market is a very global index with only 26% of revenue demand coming from South Africa and we expect significant rand weakness tailwinds so far to provide support to rand earnings for the South African equity market.

We also show below that the overall South Africa equity market is now trading at a significant discount to other emerging markets, as measured by the MSCI EM index as well to a broader global index of global equity markets as measured by the MSCI ACWI – despite the fact that the majority of the South African equity market’s earnings are derived from demand factors outside our borders.

Diversification is always in fashion when it comes to investing, but this relative valuation situation suggests that  investors should be careful before rushing to offshore markets in search of better returns.

Source: Mergence Investment Managers

Therefore, while it is not possible to predict with a high degree of confidence whether the global economy will disappoint and which direction financial markets will take,

…we believe the real opportunity for long-term investors is to look for investment opportunities in local and international quality companies with strong balance sheets.

Balance sheet strength and liquidity are particularly key variables to watch for in companies that derive the majority of their earnings from the South African economy given the sharp demand/supply shock from Covid-19 trading restrictions, further country credit rating downgrades and ongoing economic growth constraints. High quality companies normally generate strong cashflows that allow them to maintain strong balance sheets and liquidity through different phases of the economic cycle.

In addition, some industries such as the internet technology sector, food production/retail and communication are seeing pockets of increased activity levels, as restricted human movement skews spending towards these services or goods.

It is for these reasons as well as the significant overall South African market relative de-rating that we believe the greater opportunity is likely to be found in selecting high quality companies that become cheaply valued due to short- to mid-term concerns cheaply valued due to short- to mid-term concerns as well as sectors that are long-term structural market share gainers from old traditional industries.

Overall, it is clear that Covid-19 headlines and economic disruption will be with us for a while and the pandemic will surely have a significant short- to mid-term impact on the global economy. Authorities globally have responded with significant various measures such as fiscal and monetary policy easing to mitigate the impact, but it is important to keep in mind that these measures are only likely to stimulate the global economy when people become free to move and trade again.

We therefore continue to believe that selecting well-capitalised good quality stocks at reasonable prices is likely to deliver better long-term outcomes for investors. Our bottom-up research driven investment process and active ESG (environmental, social and governance) engagement with the companies we invest in are likely to contribute sustainable wealth generation over the long term.

Note: The views above are limited to SA listed equities but long-term valuation also looks supportive for SA listed global companies versus international stocks.

Peter Takaendesa is head of equities at Mergence Investment Managers.


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The argument that a few SA listed companies that derive their earnings globally can be regarded as offshore or global shares is a tired one.

It’s always appropriate to have a home bias when investing due to tax and other local factors. However, if the JSE makes up 0.5% of the global equity market capitalisation then having no more than 20% of your financial assets invested in SA is entirely appropriate.

As a first world citizen with global wealth, if you lived in Australia or Canada with a 100% equities portfolio, no more than 30% would be domestic, 10% emerging markets (mostly Asia) and the balance in global equities listed in developed markets.

A South African with 20% invested in SA stocks is already massively overweight emerging markets. It’s not a loyalty thing. It’s a diversification thing. It’s common sense.


Yes, one gets fatigued by reading repeat arguments that a good number of large SA corporations have global earnings….as if SA investors are expected not to worry (…but then how does local asset managers explain the ongoing poor, sideways performance of our JSE since 2014/15’s especially post Zuma’s Nenegate.)

Maybe I must read our asset managers a bedtime story of the “last falling colonial domino”.

So in your view fund managers must explain poor equity beta! Equity market beta in the medium- to long-term comes from the financial performance of underlying listed companies and in terms of local earnings also flows from the economic policies of Government, the skills and productivity of workers and management and the framework for activities such as entrepreneurship. Why is it that everything is the fund managers’fault when there are a host of participants in the system. Get real man!

@Colson. I’ll forgive you, as you seem to completely miss my point.

Local investors are led to believe the notion that if you invest in the JSE Top 40 for example, you’re (almost) “as good as investing directly abroad”, since a number (but not the majority) of large corporations derive earnings globally. Yet those same companies have still a fairly sizable exposure to imploding local economy.

Local asset managers have a vested interest (commissions & fees) to prefer to manage your respective funds locally, instead of chanelling it off abroad to a foreign management arm, giving up portion of fees.

Fact is, the local equity market (even with dual listed companies among them) is FAR MORE DISCONNECTED to the rest of the world’s equity markets that one is led to believe!
This manifest itself the the consistently poor local equity returns lagging the growth of global Emerging Market peers.

Not bashing local asset managers either, which are on equal professional level with global peer standards (pity about the local Auditing/ Accounting profession dropping the ball…Steinhoff, EOH, Tongaat…on which local analysts rely on)….but it doesn’t help much if SA has good asset managers, but have to manage assets on a slowly sinking ship.

I’d rather take my chances and invest with a mediocre asset manager, managing one’s funds in a persistently high-growth region/country. The rising tide lift all the boats….or the all the boats flow down-stream without much effort.
Conversely in SA, we have championship rowers, but are required to row upstream & not making any progress. Yes you’re correct, you can’t blame our ‘championship’ asset manager teams (SA’s fund pool is shrinking compared to other EM)…but a drunken boat captain will do better easily flowing down-stream.

No, this is your ‘impression’. Don’t blame others for it.

Not to pick on Mergence, but maybe Moneyweb should provide performance details of the funds that are managed by the investment houses who write articles such as these, preferably at the same time.

If the performance backs up the commentary then as investors we will have a better understanding of whether they know what they are talking about or whether is just more of the same inconsequential commentary we hear on a regular basis.

I dont think that being knowledgable or having high iq is correlated to fund performance. Many of these commentators are well educated individuals and have plenty of systems and eclectic data sources by virtue of their business hence it is interesting to here their interpretation of the data. It is no secret that many of them have no credible performance to show for their efforts…many surveys available to show how poorly equity returns have been for the bulk of managers.

I think reputable offshore funds / shares are more desirable than local funds because the JSE moves in sync with offshore markets. So if offshore goes down then the JSE also goes down. The difference is that when the JSE goes down the rand weakens and protects ones investment in Rands but obviously not if dollars etc.

Our local market looks super cheap and the rand is getting stronger! Looks like an obvious bet

Go for it. Let us know how it turns out.

Knock yourself out

I’ll supply you with tissues….. Sorry man!!

Sorry, but it is not about the currency : select the right asset and it will perform well in any currency.

For a poster child of that concept compare SABreweries and Glencore since Glencore went public

It might also matter that the one company was run by seriously world class managers and the other by Fundamentally corrupt incompetent thugs, but still..

Honestly both are pretty poor.
Aah, did someone learn about commodity cycles? Rather leave it to the pros.

Even if locally listed multinationals earn most of their income overseas – as long as you invest in Rands you run the risk of the ANC and Malema types.

Correct. It’s local sovereignty risk.

End of comments.





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