- By Australian Financial Review, 31/05/2017
In April the International Monetary Fund issued its most upbeat outlook for the global economy in years.
World growth is forecast to rise from 3.1 per cent in 2016 to 3.5 per cent in 2017 and 3.6 per cent in 2018. Yet Investment Trends’ research shows just 8 per cent of local investors intend to increase their allocation to international assets. Australia makes up a tiny proportion of the global economy, so investors who are not exposed to international markets are missing out on a huge potential pool of returns.
Graham Hay, deputy portfolio manager at Antipodes Partners, has identified changes under way in South Korea that could be interesting for investors to explore.
”Despite numerous world-leading companies, not to mention the world’s most advanced telecommunications network, most investors caught up in the excitement of growth stocks have missed a stealth bull market under way in Korea,” says Hay. He says fears around Korea’s exposure to China as the latter’s growth slowed, as well as long-held concerns over governance practices, have held investors back from Korea. While the country is hugely exposed to China, it is also a net beneficiary of lower commodity prices. There is also evidence corporate behaviour is changing.
“The recent high-profile removal of the President is further evidence of the shift in expectations of both corporate and political behaviour. The Samsung Group has led the way in implementing changes in governance structures and a more proactive approach to capital management,” says Day.”We believe this will prove a template for others to follow. There is still a significant gap in valuation between Korean companies and their Western counterparts, some of which can be expected to close as better governance and capital management policies are implemented.”
Gaudi Schneider, senior quantitative strategist at Quantifeed, says the opportunity is wider than just South Korea.
“Economies in south-east Asia might present an interesting opportunity for diversification right at Australia’s doorstep. The region is poised for growth, receiving tailwind from China’s One Belt, One Road initiative,” says Schneider. This is a Chinese economic policy designed to link Eurasian nations. ”Established financial centres at the heart of Asia like Hong Kong and Singapore provide mature equity markets to gain exposure to the region. ”Quantifeed’s research suggests adding a global position to an Australia-based portfolio can diversify risk and open up new profit opportunities, he adds. Says Schneider: “Instead of concentrating on local and regional large cap benchmarks or niche industries, investors can focus on factors like volatility or dividend yield. These strategies offer a sector-diversified portfolio while potentially offering a better risk/return profile than the common benchmark indices.”
Despite high political anxiety, Europe is experiencing a broad-based economic recovery in which local investors could participate.
”Political risks are getting all the headlines and obscuring improving fundamentals in the real economy and at the corporate level. For more than a year, economic growth in the region has been expanding at a rate close to or even above the underlying trend in most major economies,” says Peter Wilmshurst, portfolio manager, Templeton Global Growth Fund. ”The combination of firmer demand and better employment is generating positive earnings revisions. Monetary policy is still accommodative, the exchange rate is competitive, the banking sector has been recapitalised and is lending again and fiscal policy is turning stimulatory as the push for austerity fades.”
But European equities are trading near their cheapest levels relative to the US and corporate earnings are improving. ”We see the potential for further sustained recovery in value stocks as global trends such as the end of quantitative easing, the risk of deflation and a broadening economic recovery in global markets drive a return to value in forgotten parts of the market, ” Wilmshurst says. ”Valuation spreads are still very wide, creating opportunity where there are improving corporate earnings and scope for additional upside over a long-term investment horizon. ”As such, Wilmshurst believes Europe is long overdue for a rally. He says the disconnect between firming company fundamentals and depressed valuations is creating opportunities that will become increasingly apparent over the coming months in the likely event Europe avoids worst-case political outcomes, as we have recently seen in the recent French elections. ”We continue to have a relatively higher exposure to European equities in our portfolios,” he says.
Local investors can ill afford to ignore opportunities to invest in global tech stocks given there are so few listed on the local market.
”We are seeing the influence of technology on various industries. Online is disrupting traditional sectors such as retail and media. Growth in traditional bricks and mortar retailers has been affected by a shift in consumer behaviour to purchase more goods and services online,” says Garry Laurence, Perpetual’s global equities portfolio manager.
“Companies are also spending more of their advertising expenditure on search and online classifieds as millennials spend more time online whether it be on search, online video platforms or social portals,” he says. Laurence says investing in businesses that can take advantage of evolving technology such as online as a form of distribution, or artificial intelligence to make use of large amounts of data, is the best way to ensure the companies you invest in stay ahead of competition.
Global investors would also do well to look at less popular developing markets for investment opportunities.
Brian Phelps, general manager, CommSec retail distribution, says economic growth in emerging economies is still a dominant force in markets. ”Economies across India and Pacific Asia, such as Indonesia, are remaining strong, even if China slows,” he adds.