Should investors remain optimistic about the outlook for global equities?

_{By: Natalie Harrison, Global Fund Specialist at Momentum Collective Investments}

Investors in global equity markets have experienced a roller-coaster ride over the last year and a half. Stocks crashed at a record pace in March 2020, followed by a sharp rebound on the back of unparalleled fiscal and monetary responses from central banks across the world.

As of the end of August 2021, the MSCI All Country World Index (ACWI) is now 33% above its February 2020 pre-COVID-19 peak, with equity markets looking through the pandemic uncertainty to the anticipated economic rebound.

Although global equity markets returned over 15% per year since the Global Financial Crisis (GFC) lows in early 2009, we believe investors can remain optimistic about the outlook for returns from this asset class.

Valuations in certain areas, such as the US, may be trading at elevated levels, but there are investment opportunities that lie beyond the world’s biggest economy by nominal gross domestic product. As the UK equity market shakes off its Brexit discount, the economic recovery is expected to provide a strong tailwind to its unloved and attractively priced cyclical industries. Japanese equities look attractive on valuation grounds, on improving corporate governance practices that should unlock shareholder value, and for the accompanying defensive Yen exposure it brings to diversified portfolios. And from an investment style perspective, value equities continue to trade at wide discounts relative to growth and momentum stocks. Active equity managers are therefore well-positioned to take advantage of investment opportunities that lie beneath some of the expensive headline index levels and within some of the more attractively priced regions.

But beyond this positive outlook lies another fundamental reason investors should be optimistic about global equities, and it is for a more practical application, namely portfolio diversification. Beyond the shores of South Africa lies a world of opportunities. There are specialist sectors largely unavailable locally, such as biotechnology and semiconductors, economies growing sustainably more quickly than South Africa, currencies that offer the prospect of long-term strength against the rand, and a greater quantum of companies in which to invest and diversify. Where approximately 140 stocks make up the FTSE/JSE All Share Index, the MSCI ACWI All Cap Index, in contrast, comprises over 15 500 publicly listed emerging and developed market companies representing 99% of the global equity investment opportunity set. Clearly, the diversification benefits available offshore is not only that of reducing risk but also one of increasing investors’ opportunity sets to achieve better investment outcomes.

At Momentum Investments, we strongly advocate portfolio diversification and healthy exposure to global markets. But an allocation to offshore should be created around a clients’ specific needs and personal circumstances, whether that be wealth generation and capital preservation or funding a specific need like offshore education or emigration. Financial advice is, as always, critical to ensuring clients stay invested and have a well-balanced portfolio that combines both local and offshore assets that will enable them to achieve their long-term investment goals.

From a global perspective, we continue to favour equities over fixed income and other asset classes. When constructing equity portfolios for our clients, our experienced investment team in the UK implement a best of class approach by selecting and blending specialist third party investment managers from around the world, including Robeco, Jennison, and Ranier. Be it high conviction, fundamental strategies, or data-driven, systematic strategies, each of our managers have been carefully selected for their specific style approach and some competitive edge. The benefit for clients is that we blend investment styles to smooth the equity journey over time and provide South African investors with access to our top picks in specialist global fund managers that many retail investors may otherwise not have access to.

Continuing accommodative monetary and fiscal support and increasing vaccination rates across the globe underpins growth prospects, which will support corporate earnings and rising equity prices in the future. Returns will be volatile and harder to come by in the short term given the strength and pace of the equity market recovery, but for investors seeking long-term capital growth, patience and diversification across investment styles and global equity regions will be well rewarded over time.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406) (NCRCP173). The information used to prepare this editorial includes information from third-party sources and is for information purposes only. This editorial does not constitute any form of advice and should not be used as a basis to make investment decisions or as an offer or a solicitation to purchase any specific product.