Blue Chip Issue 78 - Jan 2021

OFFSHORE INVESTING
Emerging markets
Why you should consider other emerging markets (EMs) when investing offshore
Don’t let historical biases put you off investing in other EMs.
Throughout the 2010s, there were long periods when moves in
EM currencies, which include the rand, were highly correlated.
Given our history of foreign exchange controls, many investors
concluded that it’s a waste using up scarce global exposure to
invest in other EMs.
As a South African, it is true that your access to global investment
opportunities is still normalising. While government continues to
liberalise exchange control, some restrictions remain. However, the
correlation between EM currencies broke down in 2020, primarily
due to much better management of Covid-19 in Asia. In addition,
increasing political instability in some of the major developed
democracies has further undermined the popular notion that
developed markets (DMs) are the only option if you are looking
for stability and uncorrelated investment returns.
Here are the reasons why you should consider a healthy
exposure to EM assets, specifically equities, in your global portfolio:
EMs are still considerably underrepresented in benchmark
world equity indices. 80% of the globe’s population lives in
EMs, which now represent half of global economic output, but
EM equities make up less than 20% of the global benchmarks
frequently tracked by investors. Economic and demographic
dynamics suggest that EM businesses will have, in aggregate,
higher earnings growth than DMs and this should allow stock
exchange market caps to grow faster than DM caps, ultimately
increasing their relative size.
Investors in EMs stand to benefit from a demographic tailwind
not found in DMs. Just think, the Chinese upper middle class is
roughly the same size as the US middle class and the Indian middle
class is approaching the size of the European middle class – and
if current growth rates are maintained, both are set to become
significantly larger.
Also, many industries in EMs are not as developed or
consolidated as their equivalents in DMs, which gives them longer
runways for earnings growth. Given local political and cultural
requirements, local champions are more likely to remain the big
beneficiaries of technological disruption in their home markets.
There have been deep structural changes in the compositions
of EM stock markets. Back when Coronation launched its first
EM fund in December 2007, more volatile commodity-producing
countries heavily dominated the EM universe, with energy and
commodities making up more than 40% of the index market
capitalisation. Now, however, the combined weight of China,
Taiwan, Korea and India – none of which are particularly commodity
dependent – are almost 75% of the total EM universe.
Putting all these factors together, we believe there is a
convincing argument in favour of including EMs in your global
investment exposure mix.
Investing in EMs through the Coronation Optimum Growth
Fund. You can gain access to EMs through investing in Optimum
Growth, a long-term portfolio of the best investment ideas
Coronation can find around the world. The fund is unconstrained,
so it can invest anywhere in the world and across all available listed
asset classes. It currently has 70% exposure to equities, which in
turn consists of 45% EMs and 55% DMs.
Optimum Growth is managed by an exceptionally accomplished
investment team, which decides on the optimal allocation
between growth and income, as well as EM and DM assets. The
fund is aggressive and aims to achieve a long-term return of at
least 5% above inflation, so it is best suited to those investing for
periods of 10 years-plus and willing to deal with a higher level of
risk than a classic 60/40 global equity/bond multi-asset portfolio.
The fund’s average historical equity exposure was between 70%
and 80%. So you shouldn’t expect this fund to deliver a smooth
double-digit annual return, but, if you are seeking meaningful real
wealth creation and you are patient, then Optimum Growth could
be the right fund for you. Here is how it has performed over time:
More than double the index over 20 years. Investors who
have remained in Optimum Growth since its launch in 1999 have
achieved returns more than double that of the MSCI World Index
at end November 2020. As the fund marked its 21st birthday last
year, it was certainly something for them to celebrate.
Can this performance be repeated over the next two decades?
The same factors that have driven the remarkable performance
of Optimum Growth remain in place at Coronation today. For 27
years, the company has remained single-minded in the pursuit
of creating wealth for clients, while responding to ever-changing
market conditions with acuity. Active long-term investing is about
focus, agility and conviction. While no-one can predict the future,
when it comes to investing, you can prepare by building robust
and resilient portfolios.
To find out more about investing with Coronation,
visit www.coronation.com
The information contained in this article is not based on
the individual financial needs of any specific investor.
Reference to specific funds should be read in conjunction
with the minimum disclosure documents available on
www.coronation.com. To find out more, speak to your financial
advisor. Coronation is an authorised financial services provider.
50 www.bluechipdigital.co.za