Nedgroup Inv Global Equity Feeder comment - Sep 07 - Fund Manager Comment24 Oct 2007
The portfolio is currently 98% invested in the Marathon Asset Management Global Equity Fund, with the balance in cash.
The second quarter of 2007 was a good one for equity markets around the world. To some extent, it was probably meant to be, given the extremely volatile first quarter which was characterised by the Chinese share market plunging by 9% in one day, the collapse of the sub-prime mortgage market in the US and the performance of the yen which rose by 5% against the US$ in February/March on whispers that the carry trade was about to unravel. The emerging markets once again set the pace as the appetite for risky assets gathered momentum - the MSCI Emerging Markets Index jumped by 15.1% (US$-terms) in the quarter, whereas the MSCI World Free Index rose by "only" 6.7%. There were, however, a few stellar performances within the emerged universe, such as the French bourse, which rose by 11.7% and the German equivalent, which rose by 17.5%. The US S&P 500 moved ahead at a more sedate 6.3%. The "lights that got shot out" were to be found in the B(R)ICs: Brazil (+26.1%), China (+24.5%) and India (+20.8%). The "R" in the previous abbreviation, representing ssia, was disappointing as that market moved ahead by only 0.5%. After being one of the best markets in the previous quarter, the MSCI South Africa managed to gain only 2.7%.
The feature of the quarter falls outside of the equity markets, but nevertheless, still holds relevance. Nominal bond rates leapt in most markets as investors deemed it fit to reprice the risk-free rates around the world. Thus, for example, the US 10-year rate rose from 4.62% at the end of the March quarter to 5.09% at the end of the June quarter. Similarly, in the UK, rates rose from 4.95% to 5.44% and in Japan from 1.65% to 1.87%. We believe that there are a number of reasons behind this move. Firstly, bonds have been overvalued for some time now. Also, economic growth forecast have generally lagged reality. In addition, concerns around the sub-prime market in the US and its impact on other financial players (hedge funds and banks), have also contributed. Corporate spreads have widened as a result, as have bank and swap spreads. The TED (Treasury Euro-$) spread has also moved out. All these factors must lead one to conclude that there is a distinct lessening of exuberance in these markets. With the risk-free rate being repriced, can a similar action be expected from equity yields?
The redress that occurred in 2004 was driven by the greater market circumspection following the collapse of the IT bubble and the subsequent strong recovery of corporate earnings. To our thinking, the earnings yield of the market should trade at a premium to the risk-free rate - and not, as some commentators propose - at parity or at a discount. We are of the opinion that the upward move in bond rates is not necessarily done; that economic growth worldwide is more buoyant than at first thought; that monetary policy will be more conservatively applied and the next down-leg in short rates, will therefore be delayed. This must surely cap the performance expectations of equities.
Nedbank Global Equity Feeder comment - Dec 06 - Fund Manager Comment27 Mar 2007
The portfolio is currently 92% invested in the Marathon Asset Management Global Equity Fund, with the balance in cash.
International equity markets ended 2006 on a high note by recording double-digit US$ returns and decisively beating bond and money markets. Of the majors, the German share market returned 34%, followed by the UK at 27%, the US 16% and Japan a sub-par 5% (all in US$). A weak US$ had a substantial currency impact on the German and UK markets. The FTWorld Index jumped by 19%. After a brief scare in May 2006, appetite for Emerging Markets re-emerged with a vengeance, propelling that category to record a US$-return of 29%. By comparison, SA rose by 28%.
At a sectoral level - and using the MSCI as reference index - the best US$ returns of 2006 came from: Russian Banks +163%; Chinese Diversified Financials +156%; Russian Utilities +155%; Russian Materials +118% and Spanish Materials +110%. The under performers of the year were: Dutch Software -40%; Japanese Retailing -24%; Korean Auto & Durable Services-20%; Japanese Software -14% and Finish Software -11%.
As is evident from the statistics, there was a definite focus on value shares within the US, unlike the situation in SA. Our views on the year ahead are encapsulated in the following points:
- We do not believe that the current dislocation in monetary and economic cycles holds much risk for world financial markets. Indeed, 2007 will see a "toenadering" in monetary policy as those countries, which are still in tightening mode (mainly the EU, UK and Japan) approach the end of that phase. The only risk that we can identify is the aggressive unwind of the Japanese carry trade, which would have a significantly negative impact on currencies in particular;
- Inflationary pressures will remain muted. The significant expansion of productive capacity worldwide has led to downward pressure on final product prices. Together with improved economic management in developing economies, the resultant impact on corporate profitability and productivity has been significant. The risk lies in the potential for those uncompetitive economies, which are currently being squeezed by cheap imports, to raise trade and other protectionist barriers; and
- Much has been made of the housing crisis in the US and the adventof asset bubbles. Given the media and other coverage on the former, we do not propose to add to the debate other than to highlight that we do not believe it to be over yet. More importantly though, we do not see any sign of an asset bubble in the equity markets.
Equity markets are generally cheap against their history and this should provide support in the face of potential turbulence in 2007. That turbulence could come in the form of further escalation in violence in the Middle East exacerbated by the changes in the US political structures