Global markets: opportunity amid the storms?

Adapted from a transcript of a presentation given by Pieter Fourie, Head of Global Equities at Sanlam Private Wealth.
 
There are big discrepancies between different markets
It’s been a very interesting year so far. There have been big discrepancies between different markets, and the long-established trend of US equity markets and the technology-heavy Nasdaq market in particular continuing to perform better than other areas of the market is still well entrenched. When you look at Europe and emerging markets, those markets are quite weak. A market like China is down over 20% year to date in US dollar terms, whereas the Nasdaq is showing double-digit gains year to date.
Technology companies continue to drive returns
Furthermore, when we look at the components of what is driving those returns in the markets, it continues to be technology companies like Amazon, Microsoft, Mastercard as well as other semi-conductor companies like Nvidia continuing to perform very well, along with Netflix. Companies like Microsoft and Mastercard have produced good returns, but their valuations are currently quite stretched.
We think some emerging markets may have overreacted to the political news
We think that in some cases, emerging markets have overreacted to some of the bad political news, the most important being the trade war speeches from the President of America, Donald Trump. This is clearly having an impact on emerging markets at a time when some markets like Turkey and Brazil were already suffering from some imbalances, and caused a lot of weakness in those markets.
Areas with secular growth dynamics in emerging markets offer value
The core issues in markets like Turkey and Brazil are having an indirect impact on consumer staples names. We continue to focus on those areas with secular growth dynamics that continue to be unaffected by some of the geopolitical storms. We continue to avoid, for instance, financials operating directly in emerging markets.
We also feel that once the political environment has died down, and President Trump calms down a little bit in terms of what he’s saying, and some of the noise he creates, there will be some interesting valuations from where to start building positions again.
We are upping our positions in companies whose valuations are now attractive
So with that in mind, we have looked at some of the names we owned last year and which we sold, including names like Baidu and Alibaba. Those valuations, along with names like Tencent, have pulled back to levels where we are starting to increase our exposure again. In the case of Tencent, we’ve upped that position to 3% from a 2% position earlier in the year.
We also feel that the secular growth dynamics in emerging markets with regards to discretionary spending, adoption of cloud technology as well as a general uplift in disposable income will continue for the long term, and therefore we’re looking at companies that can benefit from that in the very long term.
We have found some interesting new names, including Samsung, earlier in the year, as well as names like Allergen, which is in the pharmaceutical space, as well as names like Sabre Technologies, which focuses on software and travel-related industries. We feel that these businesses have long, secular tailwinds of growth ahead of them, and by March/April this year, on the back of what Donald Trump was saying about drug pricing, those names became very interesting and traded at very low price-earnings multiples, where long-term investors could take a position.
When a company’s price gets to 23- or 24-times earnings, we typically sell
On the flipside though, we’ve also sold out of names that have worked out very well for us over the last three to four years, including names like Moody’s Corporation. They operate in a very competitive credit agency industry, but we also feel that a couple of years ago, they were unduly punished with valuations reaching very low levels. From here though, the company is going to struggle to get more expensive. So when something gets to 23- or 24-times earnings, we typically sell, even if it is a great business.
We are therefore finding more value in cyclical businesses in emerging markets than the US
With that in mind, given that the US market is quite long in the tooth, we believe it’s the right thing to continue to rotate away from overvalued businesses and into more emerging market, perhaps a little bit more cyclical businesses where we see more value, even though the risk is perhaps a little bit high in terms of forecast risk for those businesses.
It may be the right time to step away from tech stocks that have driven returns to date
Looking forward at returns, this year, markets are up 5%. We feel that, given the very lopsided effect in the market where up to 50% to 60% of the returns are driven by a very small part of the market, being US technology stocks, it’s right to step away from areas like that where perhaps the Amazons of the world and the Netflix of the world won’t continue to perform as well as they have given the very stretched valuations. A value-based approach at this stage is perhaps a better way to get returns in the market going forward.
We think it is going to be a 6% to 8% return environment going forward
We still believe we won’t see the 13% to 14% compound US dollar returns that we’ve had for our investors over the last five years. I think it’s more a 6% to 8% return environment, but that all depends on how volatile the markets will be going forward, and whether the geopolitical news in the future will create opportunities.
We are aiming to harvest the secular growth opportunities
With that in mind, we continue to be bullish on the secular growth areas we’ve identified, whether that’s electronic payments, consumer discretionary spending as well as other cloud-based subscription models. For that matter, we’re not going to sell out of Oracle, Microsoft and Sabre Technologies any time soon, as we harvest some of those secular growth winds going forward.