Barclays Global Strategist: New jobs – it’s obvious why US creates, SA not

As you might expect, the Global Strategist at UK-headquartered banking group Barclays, is no stranger to media. Henk Potts struck a confident, energetic and animated pose in our CNBC Africa Power Lunch studio today – and didn't hold back his forthright opinions. Including contrasting the recent American and South African jobs creation experiences – the country with flexible labour policies having halved unemployment while the other's economy limps along as politicians refuses to get the obvious roadblock out the way. Potts had some equally pithy advice for those structuring their global investment portfolios. A fascinating interview. Well worth investing some time watching the video. – AH  

ALEC HOGG: Joining us in the studio to share his assessment and future forecasts on what's happening in the world as well as to answer a few questions on where we should be putting our money, is Henk Potts, the Global Strategist/Economist at Barclays. In town to see your group's subsidiary?

HENK POTTS: I am working very closely with clients here, talking about some of the offshore opportunities as well. Talking about beyond what's happening in South Africa, bringing the world to our South African clients, and offering a global perspective in terms of not only what's happening in the global economy, but also where they should be investing their money.

ALEC HOGG: South Africans are moving away from the insular view of 'everything has to be on the JSE' or 'everything has to be local'.

HENK POTTS: I think that's right. I spent time with a colleague this morning who has a pretty negative view about what's happening in South Africa and some of the big challenges taking place. That's not to say there aren't challenges within the global economy. Of course, there are, whether you're talking about Europe or whether you're talking about China, but the world is starting to change. As we've gone through these periods in the years after the financial crisis, we think the US is starting to look a little bit better. We're starting to see a recovery shining through in Europe. The UK economy is booming. Emerging markets are back in fashion, so there are lots for investors to think about on the global stage as well as domestically.

ALEC HOGG: So what did you say to this colleague of yours?

HENK POTTS: I said 'you're absolutely right'. International diversifications are key. There are still plenty of opportunities for investors to prosper outside the local economy. We know from dealing with an international client base, there are many cases where clients are far too focused in terms of what's around them, locally. Of course, they have specialist knowledge of that. They should take advantage of that but actually, know that in a balanced portfolio, – globally – diversification is absolutely key, and that's part of the message we've been talking about.

ALEC HOGG: So do you just buy the MSCI World Index – 51 percent in America – spread it elsewhere in the world, and get going, or do you have some smarter insights?

HENK POTTS: Absolutely. That's an option, but I think that perhaps you have to be a little bit more selective than that. In terms of the way that we see the world, the recovery gaining acceleration in the US…. I think the recovery there has perhaps been a little bit more volatile than we would have anticipated during the course of this year, by that contraction in the first three months of the year, but starting to really accelerate.   Look at the labour market coming through. Remember, unemployment in this cycle peaked in October 2009 at 10%. Today it's down to five-point-nine percent. The consumer's out there spending. Consumer confidence is at multi highs. Look at manufacturing. Higher levels there than where it was before the financial crisis. The deficit is the lowest in seven years.

ALEC HOGG: In this country, we have a problem with unemployment in that it continues to rise. In the United States, as you've just described, it's almost halved since the worst of the crisis – down to a fraction of where it is now. What are they doing there that we could learn here?

HENK POTTS: Firstly, they stimulated the economy. They went through a very aggressive process. Think about the Fed's balance sheet swelling to more than $4.4tr. That's three massive rounds of quantitative easing. Interest rates kept close to zero now, since December 2008. What they don't have in South Africa – a major problem – is the structural issue. You have incredible flexibility within the US labour market, ability to hire and fire, and to innovate. Companies can change their dynamics.

Do you see that in South Africa? Absolutely not. You're talking about very rigid labour laws.

You're talking about companies having to work to very strict guidelines – the way in which they can hire and fire – and that discourages companies from making that decision. It's something you see in France as well actually, not just in South Africa, where you have that problem. The reality is you want the economy to boom. You want companies to be out there hiring, spending, investing, and driving the economy forward. What infringes upon that? Well, these roadblocks are in the way (such as very tight labour laws).

ALEC HOGG: So if you want to increase employment in South Africa, it's fairly simple?

HENK POTTS: I think it is relatively easy. The reality is when you look at South Africa – and I'm sure you have guests who are far better at analysing the situation… However, from an outsider's perspective, it says to me 'listen. Increase the flexibility here. Deal with the power of the unions'. That is going to be the key to unlocking some of the power that's still within the labour market: that, and encouraging companies to invest, spend, and to drive the economy forward.

ALEC HOGG: And if you don't address that roadblock, what happens?

HENK POTTS: What happens is exactly what we see. We find companies becoming nervous. What happens when companies are nervous? They're not investing. They're not spending, and that drags the economy down. That is why it looks like South Africa…well generally; the GDP growth this year is one-and-a-half percent, maybe. Part of that problem is being dragged down by the mining and being dragged down by the manufacturing sector because of the labour situation that you find in those key areas.

ALEC HOGG: Many South Africans who are aware of that, are uncomfortable with many of the issues that you've raised and they're looking now, to get a more balanced offshore portfolio. How would you structure? Would you go ETF's, United States, or Europe? Just give us some insights.

HENK POTTS: You're exactly right. In the past couple of years, we've been saying to investors 'US equities' and that's where the outperformance has been. I remind you of our calls that we've been making. Our clients appreciated how we've positioned them in the past couple of years. I think there's a broader story now. We've been saying to clients 'actually, US is okay. Earnings in the United States still looks good. Earnings expectation growth of 11 percent'. Valuations…many people say 'America's so expensive'. Fifteen-and-a-half times, historically, isn't expensive. With stronger growth and a reduction in political risk. Would investors be prepared to pay a higher price earnings ratio? I think so – 16/17 times. U.S. is okay, but now broaden your exposure when it comes to looking at developed market equities.

Also, look at Europe.  Valuations cheaper at 13.5 times, in terms of earnings for companies looking better – 14 percent earnings per share growth. The dividend that you receive is higher, so it's a recovery story in Europe with the U.S. doing reasonably well.

ALEC HOGG: Europe or the U.K.? Do you differentiate?

HENK POTTS: No, we separate the two. I think the U.K. is slightly different. We know that if you look at the FTSE100 for example, it's more an expression of what's happening in the global economy. The reality is more than 40 percent of the earnings at the FTSE100 come from the global economy. If you believe the economic activity within the global economy is picking up, it's not a bad expression of that. If not, go below that and then you start to benefit from the stronger growth we've been seeing in the U.K. Remember, the U.K. has gone from being the sick man of Europe to the fastest growing economy in the western world. Talking about growth: three-point-one percent this year – slightly lower next year, at two-point-eight percent, but a lot better than that 'doom and gloom' headline writers would have you believe just a year ago, when they were saying we were on the brink of a triple-dip recession.

ALEC HOGG: If you had just £100.000.00, would you rather put it into a FTSE ETF, or into an American S&P, for example?

HENK POTTS: Listen, we're all about balance. It's not about putting all your eggs in one basket. What we've been saying to clients is 'developed market equities'. If you're a moderate risk client, how much should you be putting in developed market equities? Probably 40 percent of your portfolio, and I would split that between the United States and also, in terms of Europe, I think there the key opportunities are better than we see in the U.K., actually.   Remember, you should have some emerging markets in there as well, and they're coming back into fashion. They're starting to see investors getting excited about some of those low price earnings ratios. I think you have to be selective there, as well. I think that as an investment community, we've been far too guilty of putting all these emerging markets into a single category as if they're the same animal.

What we've been saying to clients is look for countries that will benefit from a pickup in global activity, a stronger U.S. consumer, and increased investment and technology. What does that lead you to? It leads you to China, Korea, Taiwan, Mexico, and Poland. Again, it's all about balance. Forty percent developed market equities and ten percent weighting in emerging market equities. Balance/smooth out the process – that's what we want – happy investors working with us in partnership.