Offshore investing

Global jitters: Avoid safe havens, opportunity in overlooked sectors

The uncertain global political and economic backdrop created by unexpected recent shocks has spooked investors. However fear, particularly when spurred by short-term concerns, often creates opportunities, for long-term, contrarian investors.

Dan Brocklebank - director of Orbis, Allan Gray’s offshore partner - believes that this is a good time to be investing in stocks that are being shunned due to prevailing market sentiment, such as an aversion to emerging markets and concerns over the actions of President Donald Trump. “While sentiment swings, we do fundamental, bottom-up research to get conviction on a company’s long-term potential. Through our stock picking approach we have found a number of attractive opportunities within emerging markets.” he explained.

“We invest where the biggest discounts to intrinsic value lie. Sometimes whole industries are cheap and sometimes just a few companies. In general we find that there are interesting valuation discrepancies in most industries at the moment, resulting in a number of idiosyncratic investment opportunities,” he said. Brocklebank was speaking on the sidelines of the Allan Gray Investment Summit held in Johannesburg on 31 August.

The US health sector presented one such opportunity as Trump’s threat to “rip up the rulebook” for health care spending had panicked investors and created a lot of uncertainty and negative sentiment within the sector, he continued.

“We look at stocks on a company-by-company basis, and it was no great surprise to find a couple of  babies thrown out with the bathwater – companies in the sector where we think the future is fairly predictable and the market has over-reacted because of fears about what Trump might do,” he said.

“Our analysts perform in-depth research on a wide range of companies, seeking to understand their intrinsic value based on long-term fundamentals. We then step back and ask ourselves which shares appear to offer the greatest dislocations between the market price and our assessment of their value.”

Brocklebank says that South African investors can take advantage of these global opportunities if they are willing to avoid following the herd and resist the temptation to rush towards the so-called safe havens when things appear to be shaky. Having the willpower to stomach some short-term volatility can lead to pleasing long-term results. Given the track record of the Orbis Global Equity Fund, this strategy has proven itself – a US$10,000 investment with the Fund five years ago would be worth US$19,567 today, compared with US$17,059 from the FTSE World Index benchmark.

Orbis has also identified a number of companies in the global ecommerce space, which include JD.com in China and MercadoLibre in Latin America. “We think what’s missing is that this shift to ecommerce is such a long and gradual process that these companies are not pricing in their long-term potential,” Brocklebank said.

He added that many investors see China as risky because of slowing growth, demographic trends and high levels of debt in the banking sector, but this was unlikely to affect the long-term trend of Chinese consumers moving their retail spending online. There will almost certainly be volatility along the way, but investors tend to react to macro factors or geopolitical headlines rather than remaining focussed on the fundamentals of individual companies.

China is already the world’s largest ecommerce market with sales expected to pass $1.132 trillion in 2017, accounting for nearly half of the world’s total, according to eMarketer - a digital market research company.

“We see JD.com, China’s largest ecommerce company by direct sales, as a compelling investment opportunity, given the long-term potential of the business.”

Despite a rapid growth in sales, the company posted a loss in the second quarter of this year, largely because of the money it has spent in expanding its online direct sales business and improving its logistics network to provide customers with quicker and better service.

MercadoLibre, the ecommerce giant of Latin America, was another opportunity despite the ‘noise’ in the region. Many Latin America economies are beset by sluggish economic growth, currency volatility and there is concern over the possible impact of new US policies under Trump.

“A lot of investors see MercadoLibre and say: ‘it’s an emerging market stock and we don’t like emerging markets at the moment’.  Accepting some uncertainty lets us seek protection against losses in the best way we know  - buying assets for less than we think they are worth. The risk we are most concerned about is permanent impairment of capital - the risk that in time a share ends up being worth less than we paid for it,” Brocklebank concluded. 

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