Global political and economic activity in 2024 points to increased volatility in markets, which creates significant opportunity for active fund managers.
As half of the world’s population goes to the elections polls this year, war in the Middle East and Ukraine continues and inflation in most developed markets appears to be cooling, active managers are taking advantage of the volatility this creates to apply disciplined investment strategies.
Amplify Investment Partners expects persistently high interest rates to be a headwind for global equity markets, especially the US where market valuations remain high relative to history and to emerging markets.
“We have however seen that some companies in the tech industry (which has driven the total US market higher) have bucked the trend and continue to perform above market expectations as future earnings remain attractive,” Amplify’s head of positioning, Nico Janse van Rensburg says, adding that as bottom-up fundamental managers, Amplify’s fund managers look at share level to find opportunities.
Amplify’s managers are seeing opportunities in China which has fallen out of vogue with investors, although it should be borne in mind that other emerging markets such as Brazil fell out of favour only to become the best performing market not long after. This means that despite the attractiveness of valuations, it is necessary to manage risk from a portfolio perspective as erratic behaviour by governments have increased forecast risk.
The Amplify Global Equity Fund, managed by Sarofim & Co, continues to be overweight consumer staples, driven by its long-time investment horizon. This sector is not just a place to hide in tough economic or market environments but provides a low-risk approach to sustainable long-term growth. The fund remains bullish on tech companies, but only companies such as Microsoft, where returns in 2023 were driven largely by earnings growth, rather than multiple expansion, Janse van Rensburg says.
While offshore fixed income has not been an attractive asset class for some time, as nominal yields have ticked up, some managers have taken up exposure to US treasuries. There are also continued pockets of value in offshore credit markets where South African companies have issued USD/EUR debt. Offshore cash remains and attractive hedge in a portfolio.
Offshore property continues to face headwinds, although Amplify’s managers have identified a few select opportunities.
The Amplify Global Equity Fund has a very small portion invested directly into companies listed on emerging market exchanges, but about 25% of the underlying companies’ profits are generated from emerging markets, including China, India, South America and Africa.
Some dominant global companies derive their earnings from various regions. L’Oreal, for example, sells its products in 150 countries and roughly 43% of its earnings is derived from emerging markets, so while a company may be listed in a developed market, investors have access to a growing emerging market demographic.
Janse van Rensburg says that investing offshore provides great diversification benefits, but also an added level of risk and volatility through currency exposure. “With South Africa having one of the most traded and liquid emerging market currencies, volatility is potentially added to a portfolio, especially in the short term,” he says.
According to Morningstar, over the past 15 years to the end of 2023, a South African investor investing in the MSCI All Country World Index in USD would have achieved an average annual return of approximately 15%, with 10% from the market (developed and emerging) and 5% from the currency effect as the rand depreciated against the dollar. But on a year-by-year basis, there were instances (like in 2016 and 2017) where the rand strengthened, having a negative impact on returns. This reiterates the importance of investing for the long term.
*Sanlam Collective Investments
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