Global monetary policy: sounds like a good idea, right? Low interest rates, economic growth, heady levels for equity indices – it all seems great. So should you, as an investor, invest in these equities? Or can we still find high-quality businesses to invest in rather than risking it with volatile equity markets? These are some challenging questions indeed. According to the article below by Clyde Rossouw of Investec Assest Management, South Africans continue to find the best investment opportunities offshore (legally, of course!). Read up on his expertise concerning investing wisely and his predictions for the future. – Tracey Ruff
By Clyde Rossouw*

During the first quarter of 2015 the JSE All Share Index (ALSI) surpassed 53,000, the Dow Jones Industrial Average Index 18,000 and the NASDAQ Composite Index 5,000. By almost any measure, these are heady levels for the respective equity indices, boosted by six years of easy global monetary policy. However, these absolute levels mask the steady rise in volatility since the middle of 2014. This is symptomatic of elevated equity markets at the start of a potential interest rate-hiking cycle.
All indications suggest the US Federal Reserve (Fed) will increase interest rates, but there is uncertainty as to when it will begin and how rapidly it will be able to normalise interest rates, i.e. return to an environment of positive real interest rates. The market has pivoted on this information and the Fed’s communication of a gradual pace of rate hikes sent a very dovish signal, resulting in equities and bonds rallying as well as the US dollar weakening from its peak against the rand of almost R12.50.
Markets are elevated, but is this time different?
Easy global monetary policy has driven equity markets higher across the globe. South Africa’s equity market has been trading on an elevated price to earnings ratio of 18x. Time and time again, we hear the refrain that this time is different. The bulls claim that one needs to view valuations on a relative basis. Low interest rates and low long-term bond yields mean that the growing earnings streams from equities have been very attractive and investors should pay up for them. But, as the recent volatility of equity markets has illustrated, this argument hinges on central banks keeping interest rates artificially low forever.

Despite the unlikelihood of interest rate normalisation in the near term, as well as buoyant European and Japanese equity markets driven higher by quantitative easing measures, we believe rate hikes will eventually lead to a de-rating of price to earnings multiples, especially as we are starting from an overvalued point. Investing in equities on this basis means betting on the expertise, fortitude and timing of central banks.
Opportunities remain in high-quality companies and bonds
In our view, macroeconomic variables are inherently not forecastable and we refuse to be drawn into the euphoria of free money. Even though we do not believe that the US economy is strong enough to weather a normalisation of interest rates and the impact of a stronger US dollar, nor do we believe that the local economy can afford an interest rate increase (we believe it is futile for the SARB to attempt to quell inflation driven by food and energy prices), we cannot justify purchasing stocks trading on speculative, bubble-like multiples.
We prefer investing in opportunities that provide a tangible return. We can still find high-quality businesses generating strong cashflows trading on reasonable multiples. These businesses are relatively defensive in nature and we believe they will protect investors should there be a correction in equity markets.
On the local front, we have a limited exposure to equities, and we favour those companies that generate their earnings predominantly offshore. Within our local equity allocation, Mediclinic International, Sanlam, Standard Bank and Steinhoff International all added to returns over the past quarter.
We continue to find the best investment opportunities offshore. The portfolio’s offshore equity exposure continued to be a key contributor to performance over the past quarter, not only as a result of a rand weakness, but also due to the strong returns from key holdings such as FactSet, Japan Tobacco, Moody’s and Novartis.
Also, we remain bullish on bonds. Although there are shorter-term concerns about rising inflation, we are worried about growth in South Africa and government bonds continue to offer an attractive additional yield compared to cash.
* Clyde Rossouw is co-head of Quality at Investec Asset Management. He is a portfolio manager with a focus on multi-asset absolute return and low volatility real return equity investing. His portfolio manager duties include the Opportunity strategy that he has run since 2003 and two equity oriented Global Opportunity Equity and Global Franchise strategies. Clyde joined Investec in 1999, initially as an asset allocation and sector allocation strategist.