Investment Research - Conditions are better than you think

The last three years have been tough for economies and investors. Perhaps investors’ expectations were a bit high over the period 2009 to 2015. Over this period, global economic growth slowed and politicians increasingly dictated terms on a macro level. None of these conditions were good for investors. The good news is that we expect improved conditions from here on. International politics is settling to some extent. South African politics has been less disruptive to global markets than to domestic investments. And although sentiment is poor, we think selected equities are quite cheap right now. Earnings are recovering, active managers are outperforming and fundamental research is being rewarded. All this supports a case for better investment outcomes.

Against the backdrop of all these developments, our quarterly PSG Wealth Investment Research and Strategy Report outlines our high-level views of financial markets and our asset allocation decisions. Our analysts and contributors also reflect on some of the events that contributed to market instability in the first half of 2017. In this context, we also consider the performances of our own investment solutions. All so that you can make intelligent, unemotional investment decisions.

ECONOMIC REVIEW

International asset managers still expect emerging markets (EMs) to outperform developed markets (DMs) for the remainder of this year – even though some of them are cautious and warning investors of some turbulent waters ahead. On the valuation front, EM currencies appear about as undervalued as they were in the early 2000s, before the last large bull market. EM equities also appear attractively valued relative to DM equities, with the relative price-to-earnings ratio currently being at the 37th percentile of its historical distribution.

FINANCIAL MARKETS

In the financial market review piece, I look at the second quarter performances of the main asset classes. The long-term returns of most sectors remain well above the expectation of inflation plus 7.00%. The exception is resources, which came under pressure following a shift in Chinese policy – one led by government spending towards a consumer-led economy.

TACTICAL PREFERENCES

In the article on the tactical preferences and overview of PSG Wealth’s asset allocation in their multi-manager solutions I indicate why we remain cautiously optimistic about the prospects of equities. In general, we hold an overweight position in cash due to the negative outlook on most other flexible income assets.

DOMESTIC SOLUTIONS

Our fund analyst, Marcel Roos, examines absolute return funds. Inflation is indiscriminate and hits everyone’s pocket. It is something investors must bear in mind when they want to preserve their capital and grow their wealth in real terms. To achieve these goals, investors should turn to absolute return funds. These funds typically have a dual objective. Firstly, not to lose money over relatively shorter periods (12 months, for example). Secondly, to target inflation-beating returns over the medium to longer term, typically longer than three years. These funds aim to limit downside, while participating in the market upside, so returns are positively skewed with an asymmetric risk profile.

OFFSHORE SOLUTIONS

This quarter our senior analyst, Henko Roos, focuses on one of our global funds, the PSG Wealth Global Creator Fund of Funds. He answers frequent questions we get on this portfolio – questions that relate to the number of funds within the portfolio, whether the portfolio differs from a broad global equity index, the differences between our underlying managers and their roles within the portfolio.

EQUITY RESEARCH

In the equity research article, our Head of Equity Research, Franco Pretorius, highlights our equity strategy for the rest of the year. He explains how emerging markets outperformed developed markets this past quarter. Even the FTSE/JSE All Share Index (ALSI) managed to scrape together some returns in a time when political uncertainty continued to weigh on market sentiment.

FIXED INCOME

Recent data sets point to the possibility that global bond yields may rise again in the months ahead, while inflation is expected to continue its downward trend. We believe the balance of risks points to global yields rising again in the months ahead, led by US Treasuries. Read this article for more information on our view.

PROPERTY COMMENTARY

Our equity analysts, Bianca Haywood and Tayla Wesson, looked at the impact of online retail on domestic and international retail property counters. They explain how online shopping has created more price-savvy consumers. Today, successful retailers give their consumers new reasons to visit stores with innovative and appealing formats, displays and experiences, including tastings, demonstrations, advice and personalised services. In today’s technological world the physical store needs to engage and entertain to still be relevant.

PREFERENCE SHARES

Generally speaking, the turnover for most preference shares hovers around the 1.00% to 2.00% mark per month. This illustrates that these assets are generally not actively traded in the market. Trade volumes remain thin, with the average monthly trades fluctuating between zero (Brait) and R102.11 million (Absa).

CASH MANAGEMENT OPTIONS

We offer clients various cash management options, from investing in money market linked unit trusts (single- and multimanaged), to custody cash accounts in securities portfolios. Our multi-managed unit trust offering, the PSG Wealth Enhanced Interest Fund, has been a consistent performer. The yield on the portfolio as at the end of June was 8.76%.

SPOTLIGHT ON

In Spotlight On, our investment writer Jinine Botha discusses the results of the autumn 2017 survey topic about political uncertainty and investing. Her article explains how investors can still grow their wealth even when the country is facing political uncertainty and the impact of sovereign downgrades.

Lastly, take part in our Winter 2017 survey on your position in financial stocks.

We hope you enjoy the read. Please feel free to send us any feedback you may have – we always look forward to hearing from you.

Courtesy: Adriaan Pask, PhD - Chief Investment Officer PSG Wealth

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