Why investors shouldn’t fear international markets
George Cipolloni, sub-investment manager of the Nedgroup Investments Global Cautious Fund presented on a panel at the Allan Gray Investment Summit in August.
South Africa represents only 1% of the world’s market capitalisation according to the World Bank. Given this statistic, it’s not hard to see why investing offshore has such diversification benefits for South Africans. However, while investors are well aware of this, the uncertainty and unknowns of investing in international markets is still too overwhelming for many.
Investors should rely on the insight of offshore investment managers to make the tough decisions, particularly in times of volatility.
Where there is volatility, there is opportunity
For professional investment managers, volatility and unrest in the markets create opportunities to find value in unexpected places. We believe that good companies, or improving companies with good future prospects, should be able to perform well in any conditions.
For example, look at the market jitters around President Trump in the USA. We didn’t expect Trump to be elected. But he was – and believe it or not, the equity market actually liked it. The US Treasury market, on the other hand, didn’t and yields spiked. At the time of the election our Fund was at a very low duration and as a result investors were protected from this sharp drop in bond prices.
We believe there may even be some real investment opportunities as far as Trump’s presidency is concerned. Trump is unpredictable, which creates volatility. As bottom-up value investors this creates opportunity for us to invest at attractive price points. For example: Trump wants corporate tax cuts. If they happen, it will be good for companies’ bottom line; and if they don’t – the disappointment should create uncertainty in the market, where we can take advantage by finding value at lower prices.
The big question: is the market overvalued?
We are increasingly faced with the question from investors of whether or not the markets are overvalued. People want to know if there is there still enough to get excited about as offshore investors, and it’s perfectly understandable in this environment.
Despite being underweight equity, at 19% of the Fund relative to historic average of 25% and allowed limit of 30%, we are still finding great pockets of value. There is no denying that it’s a lot harder today than it has been in the past for us to find value – but that doesn’t mean it’s not there. It just means we need to work harder to find it now compared to post the financial crisis in 2008 when stock selection was easy as everything was cheap.
Nintendo is one of today’s exciting examples. After the disastrous launch of the Wii-U in 2012 the stock was written off and was unloved for many years. However, at the beginning of 2016 we (Chartwell) bought this stock as we started seeing positive change under the management of a new CEO. Nintendo started making their IP available outside of their consoles in the form of smart phone games (e.g. being part of the Pokemon-Go craze), Nintendo Land in partnership with Universal studios and the highly successful launch of the new Switch console which is again expected to be the top seller in the upcoming holiday season in the US. We first bought the share at $15-$18 when the company’s balance sheet was incredibly healthy at $7 of cash per share. Today, at c.$43 we believe there is still even more value to be unlocked.
Two other exciting companies for Cipolloni are Nokia (NOK) and Ericsson (ERIC). Both should ultimately benefit from the expansion of networking, especially the push forward from 3-4-5G technologies over the course of the next five years or so.
Although there is a lot of focus on the ‘game-changer’ technologies on the horizon, the ‘Internet of Things’ like the Google self-driving car will rely – heavily - on 5G connectivity. 3G and 4G will simply not cut it. What makes these two so exciting for us is the fact that they are currently completely unrecognised by the market and trading a cheap multiples. However, they both have the balance sheet strength to sustain themselves and take advantage of the inevitable growth in the tech sector.
Stay the course
We urge investors to stay the course once invested and to rely on their fund manager’s investment philosophy to prevail through volatile cycles. Today, probably more than ever, we believe that our longer-term focus when it comes to valuing opportunities is crucial.
Unlike many sell-side analysts who focus on quarterly earnings, we look 3 to 5 years out, or even longer. We focus on looking beyond the daily noise and to look for businesses that are trading at a discount, but have improving return on capital, healthy balance sheets, strong competitive positions and (new) management teams with good track records of turning companies around. These are the businesses that we believe can perform well no matter what the investment environment.