The Search for Yield in Emerging Markets - MacroSolutions Perspectives

Peter Brooke  0:00  

Good day. My name is Peter Brooke. I'm a Portfolio Manager at the Old Mutual Investment Group. 

This is Macro Perspective number 42 of 2020. This week, I'm sending my note in from the village of Rhodes next to the Lesotho border, where I've just been riding for a couple of days and climbed Ben Macdhui yesterday, which is next to Tiffindell Resort. 

What I want to talk about is last week, I attended a couple of different conferences, which is some amazing input into our process, and covering a wide range of topics. So a lot of focus on the energy sector, and the changes that are happening there. Where 13 years ago, people were talking about peak oil. In other words, there wouldn't be enough oil. And now they're talking about peak demand. So a complete change around. The US election is obviously very topical. And my view is that Trump has already lost. 

Maybe that's optimistic thinking in terms of my own perspective, but the polls have been fairly constant. And I think the way markets are moving, is they're actually already starting to price that in. The key long term issue from that is really about the tax rate in America, and what impact that will have on the S&P profits. But perhaps the most interesting part was the focus on how do we deliver real returns going forward. And because it was a global conference, it was very much focused on their problems, where you've got this terrible issue of actually getting negative rates on a lot of debt. 

The quest for yield has crashed out, there's been a huge risk on event in terms of high yield credit. And the ability to build a portfolio is then very stressed. And you had people like Kyle Bass, who is one of the famous hedge fund managers who made money out of the global financial crisis, talking about owning a warehouse full of nickels. So trying to arbitrage the value of the copper and nickel in the coin. And he thinks that's a better way to store money. But increasingly, what came through was the need to deliver returns will force money out. 

A lot of the commentators were talking about the fact that emerging markets still have yield. And that's a potential place to look. The reality has been that this year, with the COVID-19 crisis, there have been net outflows from local currency funds, and from equities, and we've seen that same pattern in South Africa. But as they run out of opportunities within which to get a return in the developed world, they'll eventually have to come and find the returns here. 

,So some of the commentators were even talking about the South African bond market, and particularly the long end of our bond market, where the rates are very high. All of this bodes well for our own assets in South Africa, we still have real returns on our bonds, and we have cheaply valued equity. So the surprising outcome of this developed world problem is that actually, it felt like better returns for South Africa. 

I won't be doing a voice note next week because I'm on holiday. 

Chat in two weeks' time. Bye.