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Where in the world to invest?

By Tony Barrett

Many market commentators agree that the current environment leaves limited room for anything but equity exposure. However, current equity valuation levels might give cause for concern among some investors.

The consensus view is that there is further room left for equity growth and substantial equity exposure within portfolios is strongly recommended. But, where in the world do you invest in equities? Recently the business news agency Bloomberg ran an article which delved into this dilemma and, in the process, gave investors some interesting food for thought.

Quoting from a recent Bank of America report, Bloomberg's informative chart (PDF) shows that despite recent rockiness, US stocks have enjoyed a good run over the past year. But the big winner (when comparing in US dollar terms) was India.

The Wall Street Journal noted India’s performance - along with that of the Philippines and Thailand - in a late-2014 article (Asia Stock Indexes Among World’s Best Performers in 2014), which noted that “declining oil prices have also been a positive for Asia, especially big energy importers like India and China, while it has pressured stocks in other emerging regions, including Russia and the Middle East”.

The data certainly highlighted that it takes a brave investor to go for an asset class like Russian equities, which went from hero status in the year-to-date returns to virtual zero at 55th status in the weekly numbers.

The stats also showed that the clear losers across all periods were Greek equities; although that’s no big surprise. German stocks, said Bloomberg, have also lagged when priced in US dollars, largely due to the weakening euro.

According to information from the London-based World Federation of Exchanges (WFE), one of the world’s largest financial services trade organisations, 2014 showed a strong increase in equity trading volumes (of +17.4%) to US$81 trillion from 2013’s figures.

The WFE noted that all regions were affected by this increase to a relatively similar extent: +18.9% in Asia-Pacific, +17.4% in Europe, the Middle East and Africa and +16.5% in the Americas.

In its annual Statistics Market Highlights report, the WFE highlighted the main trends over the past year as:

  • The number of trades rose 23.7% from 2013; although the average value of trades continued to decrease.
  • A continuing good performance of equity markets saw global market capitalisation rising 4.3% to US$68 trillion from 2013.
  • Initial public offerings (IPOs) and investment flows continued to deliver good performances. The number of IPOs rose 24.3% from 2013 to 1 421. Total investment flows in US dollars increased 22.6% from 2013 to US$894 billion.
  • Exchange Traded Derivatives volumes rose 2.8% from 2013, mainly driven by commodity derivatives.
  • In the Americas and Europe, the Middle East and Africa, the 2014 increase in the value of share trading followed a significant increase in volatility on equity markets:
    • In the United States, the S&P 500 Volatility (VIX Index) increased by 39.9%, to 19.2.
    • In Europe, the EURO STOXX 50® Volatility (VSTOXX®) increased by 51.8%, to 26.2.
    • In Asia Pacific, growth was mainly driven by an impressive increase in the value of share trading on mainland China during the last quarter of the year.
    • In the rest of the Asia Pacific region, the value of share trading decreased by 5.4% in 2014.

In light of the Bloomberg figures, and these WFE performance statistics, one thing is sure: For South African investors, trying to pick winners from virtually obscure markets is a recipe for disaster, and a sure way to lose money over the long term.

Note how the global equity index is a consistent top quartile performer. Over the past year, South African equities, as measured in US dollars, have come  in 16th place overall. The return difference between the top performers and the relegation threatened candidates is truly remarkable, a positive 30% to a negative 66%, that is a swing factor of close to 100%.

What lessons can be learnt?

The big wide world of potential investment destinations should not scare off potential South African investors. They should rather decide on a strategy and investment plan and then stick to it. Greed and fear are always big drivers in terms of psychological behaviour of investors; don’t get caught up in this conundrum, but rather seek professional advice.

  • Tony Barrett is a Senior Wealth Advisor at RMB Private Bank Tony is a strong advocate of offshore diversification for South African investors and is well placed to advise on this matter.
  • Contact RMB Private Bank’s wealth and investments experts for all your investing, fiduciary services, stockbroking or wealth management needs.