22 November 2007
Equity markets in the emerging world have weathered the sub-prime credit crunch in developed markets more easily than any previous market turmoil, and are expected to remain a sought-after investment destination, if not a safe haven, for many years to come, according to Steve Minnaar, head of equity research at Old Mutual Investment Group SA (Omigsa).
Speaking at a presentation in Johannesburg on Tuesday, Minnaar said this year’s shake-out of credit markets had in fact helped to accelerate an investor shift from the developed world to emerging markets that has been under way since 2001.
He said investors were likely to take advantage of the expected faster growth rates and better relative returns to increase their exposure to emerging market equities – including some attractive companies listed in South Africa.
Outperforming developed markets
Emerging equity markets have outperformed developed markets since 2001, with the MSCI emerging market index moving up five-fold – from just above 250 points in 2001 to around 1 300 points currently. By comparison, the MSCI world index recorded an increase of just over 70% over the same period.
In response to the sub-prime crisis in the US, some key emerging equity markets, like South Africa, saw immediate drops of 12%. However, they quickly recovered, Minnaar said, and the MSCI emerging markets index has since then gone on to outperform developed markets.
In fact, he said, many investors reacted by shifting funds from the major developed markets to emerging markets. In the fourth week of September alone, US$13-billion was withdrawn from US, Japanese and European equity funds, of which $5.5-billion went directly into emerging market funds, according to EPFR Global, which monitors international fund flows.
“It’s still about the search for yield, and investors now have more knowledge of, and confidence in, emerging markets,” Minnaar said. “US fund managers typically seek returns of over 10%, which they can’t get in their own market or Europe – they have to look elsewhere.”
$94-billion over next three years
According to a recent Citigroup poll of chief investment officers, representing over $1-trillion in assets under management, professionals plan to increase their emerging markets exposure from 5.7% to 15.1% of their portfolios over the next three years, while cutting US positions and maintaining those in Europe.
“Allocations to ‘other’ emerging geographies (like Africa) are expected to rise to 3.5% from 0.4% currently,” Minnaar noted. “This implies $94-billion in fund inflows to emerging markets between now and 2010.”
African markets should benefit from this trend, Minnaar pointed out, attracting investments due to robust economic growth and improved liquidity and regulation in recent years.
A November 2007 report from the World Bank showed that sub-Saharan African economies grew at 5.4% year-on-year over the past decade, above the global average of 3.2%, and are forecast to grow at 5.3% in 2007 and 5.4% in 2008.
SA investors: look closer to home
“Too often South African investors look past Africa to more distant destinations for their emerging market investments, but they shouldn’t forget to look closer to home,” Minnaar said.
“In sub-Saharan Africa today, outside South Africa, collective market capitalisation now stands at a substantial $60-billion. Although the economies of the region are dominated by resources, because most resource companies are listed elsewhere, sub-Saharan equity markets are, in fact, dominated by financial counters, accounting for 48% of listed companies.
“Financial services and consumer-related companies are growing strongly in many countries, and these sectors are among those that should see accelerating growth in the future.”
At the same time, Minnaar pointed out, individuals didn’t have to invest in an emerging markets fund to gain their exposure, but could easily build their own emerging market portfolio with a handful of locally listed shares.
“We have numerous South African-listed companies with a well-established presence in emerging markets, like BHP Billiton, Anglo American, MTN, Standard Bank and SABMiller.
“There is also a second tier of companies that are now increasing their operations in emerging markets, like Didata, Shoprite, Vodacom and Telkom. With such good growth prospects ahead, local investors shouldn’t be afraid to include emerging markets exposure in their equity portfolios.”