Argentina and our take on emerging markets

In Argentina a surprise election result heightened investor fears that populists could replace Argentina’s current, more business-friendly government, triggering a drop in the value of the peso against the US$ by 49% and the equity market by 43%, erasing all the gains for the year.

This should be a lesson for South Africa in the sense that our increasingly populist policies might rake in the votes for the ANC, but there will come a time when international business will have had enough and will pull the plug on SA. Cyril will have to privatise bankrupt SOEs, lower taxes, fire corrupt politicians and confront Labour Unions head-on. However, this will not happen because then he will lose his job and the ANC will fall from grace, so the best alternative for an investor in SA is wealth diversification.

As we explained in our last blog, JWR uses strategic asset allocation to manage the risk for our clients. We have decreased exposure to the local equity market for  the longer-term portion of our clients’ portfolios for some time now, and currently we are looking at increasing the emerging-market portion for the longer-term component. The reason we want to do this, is simply diversification.

Currently we see the US market as the driver of equity returns but this cannot go on forever. We also see the rest of the developed economies like the EU, UK and Japan struggling. It is fair to say that interest rates in the developed economies are not giving investors a worthwhile return, and in Europe even negative returns. The logical assumption to make is that the higher yields on emerging-market debt, such as government bonds in South Africa, become very attractive alternatives for shorter-term investors. Also, because of the strong US$ and equity markets, the currencies and shares of emerging markets have become very attractive on a valuation basis.

Given the fact that South Africa is thrashing around like a headless snake, and the fact that we do not want to abandon the potential of higher returns generated by emerging markets going forward, we see value in staying in emerging-market equities but not all of it in SA. So, consider countries like China, India, Brazil, Russia and Mexico. Although we are comfortable with our exposure to debt instruments in South Africa at the current valuations, which will fund your shorter-term needs in rands, we do want to diversify our emerging-market exposure in the longer-term portion of your portfolio by moving some of the SA exposure into other emerging markets.

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