Global Investing

South African equities hit record highs, doomsayers left waiting

Earlier this year it seemed that an increase in global bullishness meant the end of the road for risk-off investment strategies and, by extension, the rise in South African equities. However, 6 months later, the band is still playing, and the ship is refusing to go down.

South African equities have flourished in the face of the doomsayers, with returns this year doubling the emerging market benchmark equity performance. Both the all-shares index and the top-40 share have hit fresh all time highs this week, and prophecies of gloom for South African stocks appear to have missed the mark somewhat.

Part of the reason for this is that, when it comes to risk attitudes, much of the song remains the same. South Africa has certainly benefitted from its continued attractiveness to risk-off investors, as global bullishness has receded from whence it came. For instance, as it is relatively well sheltered from euro zone turmoil, and as major gold exporter, firms based in the gold sector are ostensibly an attractive investment for the globally cautious.

However, while ongoing uncertainty in the euro zone has meant that global sentiment has not recovered to a consistently risk-on position, there is more to South Africa’s performance than just a reliance on safe-haven gold. This is demonstrated by the highly fluctuating performance of gold during 2012, adding 3 percent to its value in total in 2012 and dropping in value over the second quarter. By contrast, South African equities have grown in value consistently over the year, adding ten percent thus far.

Indeed, according to John Paul Smith of Deutsche Bank, it’s not because of the country’s natural resources but despite them that equities have hit fresh highs. Resources have notably underperformed in South Africa this year, and other sectors such as financials, consumer stocks and telecommunications have been supporting the rise.

Emerging Markets: the love story

It is Valentine’s day and emerging markets are certainly feeling the love. Bank of America/Merrill Lynch‘s monthly investor survey shows a ‘stunning’ rise in allocations to emerging markets in February. Forty-four percent of  asset allocators are now overweight emerging market equities this month, up from 20 percent in January — the second biggest monthly jump in the past 12 years. Emerging markets are once again investors’ favourite asset class.

Looking ahead, 36 percent of respondents said they would like to overweight emerging markets more than any other region, with investors saying they would underweight all other regions, including the United States. Meanwhile investor faith in China has rebounded  with only 2 percent of investors believing the Chinese economy will weaken over the next year, down from 23 percent in January. China also regained its crown of most favoured emerging market in February.

Last year, the main EM index plummeted more than 20 percent as emerging assets fell from favour. So what is the reason for this renewed passion in 2012?

Rebasing investors’ confidence

Interesting change by State Street in its monthly sounding of its institutional investor clients. The firm has gone back over all its data and rebased it in order to get an indicator that not only marks up and down changes in investor confidence but also suggests what regime investors are in. Ken Froot, the Harvard professor who co-developed the index, describes the move thus:

“We have revised the Investor Confidence Index to provide a better guide as to the level of risk tolerance. Specifically, we have rebased the index so that a level of 100 is ‘neutral’: readings above this level tell us that institutional investors are increasing their allocations to risky assets, while readings below 100 indicate that institutional investors are reducing such allocations.”

So what does this month tell us? The global index is now at a 10-month high, having risen every month since December.  But according to the new rebased reading, it has only been in territory that indicates the buying of risky assets for the past two months.

Reuters Funds Summit: Kingdom for a horse

Anyone expecting investors to start galloping back into riskier assets in a rush might have something of a wait, according to Kathleen Hughes, who runs money funds for JPMorgan Asset Management in Europe. They are more likely to wander back in.

“Risk appetite returns in stages. It leaves on a horse but comes back on foot,”  she rather neatly told a Reuters funds summit being held in Luxembourg.

There are nonetheless some signs around that show leather is getting some wear. Fund trackers EPFR Global says that although overall fund flows fell during the second week of March, there were some signs of growing risk appetite. Commodities, technology and energy sector funds as well as global emerging market equity and non-Japan Asia funds all saw net inflows.