At the most recent conference of The Investment Forum hosted by the Collaborative Exchange, the mood was decidedly cautious. Even more intriguing was how politic most investors were about it.
For some the angle was one of “well, has South Africa’s recovery gone far enough for now and does more have to be done to lock it in?” That doesn’t seem unreasonable, especially given the rude surprise the budget process had for the market and the public this year.
For others, it was a dilemma of what to do about a flick-flacking random number generator such as US President Donald Trump.
Investors have no reason to feel particularly warm about his first presidency (even if we strip out the arguably unique Covid period). With a completely free hand and no offset from Congress or the Senate, we are certainly going to get a concentrated form of Trump in the years ahead.
Suffice it to say that any active manager consciously looking to generate alpha in the intermediate future is going to need either a high degree of innovation and flexibility, or to have laid the field of battle very carefully indeed.
It was certainly noticeable how few presentations there were on investment style; there were three, two of them by Andrew Williams of Schroders Investments on value investing. He started by pointing towards the evergreen arguments for value investing, but then digressed into the innovations overlaid on the process.
In particular, arguments explicitly pointed towards just how important it is to keep value traps out of the feasible value investment universe. This is a useful point, and not dissimilar to the one I made a couple of years ago in IM about the importance of keeping low-quality counters out of small-cap investing.
Since January 2020 India, Indonesia and Brazil have delivered earnings growth comparable to the S&P 500
The reason for the parallel is that value traps are often low-quality companies. Their share prices tend to show it as well, and Schroders illustrated the point by mentioning a five-year return of -20% as a value trip filter.
When I questioned Williams afterwards, there wasn’t much more forthcoming (which means I was probably moseying into secret source territory), though he mentioned that stop losses are helpful too.
Given my sense about the need for innovation and suppleness in the present environment, I decided to look at what one of my favourite international fund managers is up to.
GQG Partners’ report “Turning Tides in Emerging Markets” highlights a resurgence in selected emerging markets (India, Indonesia and Brazil) after a prolonged period of underperformance. The revival was attributed to improved economic policies, stronger banking sectors, reduced leverage and robust corporate earnings.
Emerging markets are known for booms and busts and though the 2010s were marked by poor economic decisions, excessive leverage and political unrest, the significant reforms employed to address matters triggered a reset.
In response to past economic downturns, India, Indonesia and Brazil implemented pro-business policies that led to fiscal improvement and reduced inflation. They reduced their trade deficits from 4%-5% of GDP to 1%-2% over the past decade, while inflation rates improved from about 10% at their peak to mid-single digits.
Their banking systems are more robust, with improved loan growth and cleaner corporate balance sheets.
This strengthening is crucial, as banks often represent significant portions of emerging equity markets. Since January 2020 India, Indonesia and Brazil have delivered earnings growth comparable to the S&P 500, despite having limited technology exposure. This earnings recovery, coupled with attractive valuations due to a lack of multiple expansion, presents compelling investment opportunities.
It has to be said that Indian markets are as expensive as US ones, but at least they have GDP growth instead of the negative GDP now expected from the US.
The GQG report doesn’t mention it, but the three countries tipped above were all members of Morgan Stanley’s 2013 “fragile five”. The other two were South Africa and Turkey, both of which shouted at the rest of the world like a couple of drunk know-it-alls.
Turkey has grown, but only with horrific inflation that will take a nasty recession to clear. As for South Africa — when will we decide to roll out a red carpet instead of red tape for investors?
Warwick Lucas is a portfolio manager at Vunani. The views expressed here are his own
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