Old Mutual Global Emerging Markets looks to Brazil and Mexico
Old Mutual Global Emerging Markets is looking at investment opportunities in Brazil and Mexico rather than SA, which has become one of the least attractive emerging markets.
Equities in these markets are offering more value than South African stocks at the moment, due to the slow pace of the country’s economic recovery, according to Old Mutual Global Emerging Markets joint fund manager Feroz Basa.
Recent volatility centred on US-China trade conflict has hit emerging markets particularly hard, when compared with previous exchanges of rhetoric and tariffs.
Analysts maintain the market is now pricing in reduced economic growth as a result, warning the rand seemed particularly vulnerable.
"I am getting world-class valuations in Brazil and in Mexico — good, high-quality management teams that are able to manage through cycles, and which have strong balance sheets that can manage through tough times," said Basa
SA had enormous long-term economic potential, but in the short term, opportunities seemed better elsewhere.
Investors should maximise their weighting in developed markets and focus domestically on the major stocks with consistent performance, said Basa.
The standard importance of quality management and industry performance remained, although depth of balance should be in focus, as evidenced by the recent pressure on many local construction stocks.
The Old Mutual Emerging Markets fund is invested in about 200 shares, managing a portfolio of more than R2bn.
While market commentators disagree about whether the US and China have technically entered a trade war, and many tariffs have not yet been implemented, broad consensus is that the imposition of protectionist measures between the countries will now reduce growth.
Threats of global trade conflict have been weighing on investor sentiment since February, but the latest round of tariffs imposed over the past week has resulted in much more severe sell-off of emerging market equities, said Capital Economics senior emerging markets economist William Jackson.
This was due to the prospect of simultaneous monetary policy tightening by the US Federal Reserve and European Central Bank, as well as indications that emerging market export growth was slowing and would likely weaken further, he said.
Counters that derive the bulk of their revenues from SA also faced the prospect of further rand depreciation.
The rand was in the crossfire, as SA had little to offer, due to anaemic growth rates and relative differences in interest rates, said Rand Merchant Bank analyst Isaah Mhlanga.
The Reserve Bank cut interest rates in March, even as other emerging market central banks had improved their currencies’ attractiveness by increasing rates, although for country-specific reasons.
"This leaves the rand as vulnerable as taking a naked swim with jelly fish," said Mhlanga.