By Alwyn van der Merwe, 11 June 2013
Any overseas visit, be it for work or pleasure, is essentially an adventure.
A recent visit to the US, where we attended inter alia the annual general meeting of Berkshire Hathaway and later visited several asset managers and investment analysts in New York and Boston, was no exception. We wanted to test some of our macro views of the global economy against those of the world’s best investment brains. It is important to us to continuously test whether our investment philosophy is still relevant, given the requirements of the majority of our clients.
It is widely reported that Warren Buffett and Charlie Munger consider only the merits of companies when deciding to invest, largely ignoring the macro environment.
Personally, I think this is far from the truth if one listens carefully to them. Buffett regularly comments on how investor-friendly the US is and that the US is in a much better position to address economic problems than, for example, Europe. For this reason, they are generally more comfortable in considering investing in the US.
I do not disagree with this view, but to my mind this once again proves that macro factors can never completely be ignored as far as investment decisions are concerned. The first macro observation was the general optimism of most investment strategists concerning the recovery in the American economy. We share Arthur Kamp’s view that the American economic recovery is based largely on the recovery in the housing market, the growth in employment and, of course, the functioning of the banking system.
All three of these aspects are showing signs of recovery, especially with the recovery in the housing market being highly positive.
I would not be surprised if economic growth forecasts are adjusted upward by economists. Secondly, there is still general optimism regarding American equities, in spite of the recent strong rally. In fact, when the S&P 500 was trading north of the 1 630 mark, the year-end targets of both Deutsche Bank and Goldman Sachs were exceeded. Both analysts responsible for these targets are fairly philosophic in this regard. Neither of them is really worried about a significant correction, although they do admit that a continued rally in the market could be driven mainly by a rerating, since profit growth for the rest of the year is estimated at approximately 5%. The general view is that government bonds and cash do not offer long-term solutions. Furthermore, much is being said about the so-called rotation from bonds to equities. However, official figures do not support this view.
The general feeling is also that investors should fight the central banks’ measures to create liquidity. As long as the foot is still on the accelerator, share prices may be supported.
Thirdly, we as South Africans were, of course, interested in the analysts’ views concerning commodities and commodity shares. The general feeling was that the supply of metals did increase after several years in reaction to the increased demand during the structural bull market for commodities. The increased capacity and the slight slowdown in the demand for metals could exert further downward pressure on metal prices. Labour unrest and increased production costs in SA are creating scepticism among them regarding SA mining shares.
Fourthly, it was somewhat of a surprise that the current upturn in global equities is driven not by cyclic shares but by non-cyclic shares. This is an indication that although investors are looking to incorporate more risk into their portfolios, they want to do this in less risky assets within a risky asset class. From a philosophical point of view, I became acutely aware of the conflict among investors between long-term investment objectives and short-term views and emotions. Investors often say they have a long-term view when buying an asset. Yet, highly complex investment strategies are being developed and sold to clients in order to protect portfolios against a drop in prices in an effort to minimise potential volatility. Not only are these strategies complex, but they are also expensive. Of course, if investors really had a long-term view, hedging would not have been necessary at all. In conclusion, this journey was, as usual, interesting. Following this trip, it is not necessary for SPI to recalibrate the compass, but we would like to warn against the current American sentiment and against complacency, especially following the strong rally in industrial stocks.