Stats and themes

Flying back home recently from OR Tambo international airport, I couldn’t help but notice that by putting some distance between myself and the earth below, we get to see things from a completely different perspective. On the ground, everything seems to be moving constantly, but as the airplane goes higher and higher, the movement and the noise below becomes less and less, until all goes quiet and you can only see the broad outline below. This may sound quite philosophical, but I take this approach often when analysing investments. When we have TV news yammering in the background while watching a screen full of live prices, we tend to lose perspective, which can lead to poor investment decisions.

This week, I would like to take a look at three themes and statistics that are currently making quite a bit of noise in the background:

Chinese internet companies vs. US internet companies

I think most of you will agree that the internet equity sector has definitely been one of the best investment options over the past three years. Since October 2015, both Chinese (KraneShares CSI China Internet ETF) and US internet companies (First Trust Dow Jones Internet Index ETF) have grown by more than 90% in USD-terms. This trend, however, started to take a turn in the opposite direction in 2018.

Chinese internet companies were terrorised by strict regulations and a trade war with the US, which caused Chinese internet companies in total to grow by only 27% in three years in USD-terms up to 12 October 2018. Why do I use the word, “only”, if this clearly is still exceptional growth? Well, because their US counterparts grew by 74% over the same period. Very briefly, Chinese internet companies’ growth declined by 25% in USD-terms, while US internet companies managed to grow by 17% in the same environment.

Graph 1: Chinese internet companies vs. US internet companies (source: KraneShares & First Trust)

If South African investors are wondering why this is significant locally, the answer is Naspers. Tencent is the largest Chinese internet company, and also the company that makes up the largest portion of Naspers. For those of you who still feel that the internet company theme remains a good investment over the long term and that the butchering of Chinese internet companies is just an overreaction, these two companies can definitely be considered. But be warned: any investment that can grow by 90% in a relatively short period, and decline by 25% in an even shorter period, can  (and probably will) place you and your emotions on a very wild rollercoaster ride.

Global technology – will this time be different?

Needless to say that the circumstances (and valuations) were different back then, but we have had a global technology bubble before, and it popped with a bang. The fact remains that global tech companies (iShares Global Tech EFT) have grown by a whopping 64% in USD-terms over the last three years in the same environment where the MSCI All World Index (iShares MSCI SCWI ETF) grew by only 20% over the same period.

Graph 2: Global tech companies vs. MSCI ACWI (Source: iShares)

We have all seen the advances in technology over the years (smart phones, smart cars and new payment methods when purchasing something), but I have to wonder whether this is enough to justify the three-fold growth that global shares have experienced. I would recommend taking another look at your investment portfolio to make sure that this sector doesn’t take up too much space in your total portfolio, just in case history happens to repeat itself.

Did emerging markets really perform that badly?

At -16% growth for 2018 (Vanguard FTSE Emerging Markets ETF) until 12 October, the short answer is a definite yes. But we need to view this in context. When compared to developed countries’ growth of -10% (Vanguard FTSE Developed Markets ETF), it doesn’t look too bad, leaving the total growth between these markets pretty much the same over the last three years.

Graph 3: Developed markets vs. Emerging markets (source: Vanguard)

Investors should remember, however, that emerging markets have historically shown faster growth than the more established developed markets and this sharp decline since the beginning of 2018 has definitely grabbed the attention of many investors.

Again, I have to warn investors that (no different to Chinese internet companies), emerging markets definitely carry more risks when compared to developed markets, so always consult an expert before you make a definite decision.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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