Add global equities to your portfolio to boost returns: expert

Boost your investment returns with a dollop of global equities in your share portfolio. That’s the message here from Francois van der Merwe, who heads macro research at Novare Investments. He has looked into his crystal ball and sees better prospects for stocks in developed markets than back home. This is partly because the South African economy is not delivering as it should – and also because the so-called developed countries are at last shrugging off the financial crisis. You can add global equities to your portfolio in a number of ways. You can opt for a domestic equity fund that includes international diversification. You can also invest directly in global equity trackers and stocks listed in New York or elsewhere. This is easy, and cost-effective, through a do-it-yourself web-based share trading platform offered by a South African financial services provider. For more on that, visit the BizNews global investing section (or read: Buying international shares from your laptop in SA: How to get started). – JC

By Francois van der Merwe*

Global equities are likely to benefit most as the theme of resynchronised global growth continues playing out over the coming year, with developed economies accelerating gradually and emerging markets bottoming out.

Francois van der Merwe of Novare Investments sees global equities producing solid returns for investors.
Francois van der Merwe of Novare Investments sees global equities producing solid returns for investors.

Looking at the first quarter of 2014, global macro-economic risks were mainly in the emerging world. However, a deflationary environment, especially for the Eurozone, can’t be ruled out. Within emerging markets, there will be greater differentiation between economies with healthy fundamentals and those that have failed to implement the necessary reforms.

In the US, the economic recovery is broadening and 3% or stronger GDP growth this year is not an unreasonable expectation. The US job market recovery remains intact and, together with improved confidence levels and rising wealth, should lead to more robust consumer spending.

Absent from the recovery has been business capital expenditure, but this also looks set to reverse given record profit margins and historically low borrowing costs. Interest rates in the US are likely to remain low to avoid putting the recovery at risk and jeopardising the efforts of the last few years.

While the Eurozone remains fragile, indicators are moving in the right direction, real economic activity is following and confidence is rising. The main threat is a Japanese-type deflationary environment.

Chinese economic growth seems to be bottoming and the government has noted the importance of targeted growth of 7.5% in combating unemployment.

In summary, global growth is likely to improve at a rate below potential with muted inflation risks and ample room for central bank policies to stay accommodative.

Developed market fiscal consolidation is slowing and should stop subtracting from growth. As the recovery strengthens, it will remain uneven amongst emerging economies where governments need to implement reforms to reduce structural imbalances.

Despite slightly lofty valuation levels, the environment will benefit global equities over bonds as improving growth leads to a re-acceleration in corporate earnings.

Technical corrections in the equity market cannot be ruled out, but the bull run looks set to continue for a while. We remain underweight global bonds and prefer absolute return orientated fixed interest strategies.

Where the local economy is concerned, the Reserve Bank is likely to raise interest rates in May, either by 0.25% or by 0.5%, depending on the weighting given to the impact on growth in the decision-making process.

It is concerning that despite historically low interest rates, the economy is performing below potential and households continue to be highly leveraged. Furthermore, power supply problems put a cap on potential growth.

Higher interest rates, rising inflation, a slowdown in bank lending and a squeeze on real disposable income growth will impact consumer spending. With the demand side of the economy slowing down, one would have hoped that the supply side would take up the slack, but mining continues to be compromised by industrial action while manufacturing production loses out on competitiveness. Manufacturing should, however, be helped by the weak rand and rising global demand.

The current account deficit will stay under pressure due to weak manufacturing and mining activity, even though a slowdown in consumer demand will reduce import growth. The economy is likely to be reliant on volatile foreign portfolio inflows to fund the current account deficit.

We don’t expect South Africa’s foreign credit rating level to improve given its socio-economic challenges.

* Francois van der Merwe is Head of Macro Research at Novare Investments.