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The energy sector

Kevin Johnson stated that Dodge & Cox has a positive view on oil over the next five years, believing the supply and demand imbalance will correct itself eventually – but with opportunities being created now. James Brown countered that BlackRock has a more neutral view, with Mike Soekoe of Foord in agreement. BlackRock has reduced exposure in this category since the end of 2014, removing companies at risk of having to cut dividends.

Exposure to SA and Africa

Foord has no exposure to SA within its Global Equity fund, and expressed concern over the SA and African region in general, citing labour issues, policy uncertainty and the twin deficits as detractors within SA.

BlackRock currently has no exposure to SA, preferring to focus on companies in the developed world, although in many cases they will generate revenue in countries other than the country in which they are domiciled.

Dodge & Cox has both direct and indirect exposure to SA and has had a relatively large holding in Naspers over the last 10 years. Kevin Johnson also noted that they have a position in MTN, as much of the bad news has already been priced into the share.

The impact of non-economic events

Responding to the question of how non-economic events affect portfolio planning, BlackRock re-iterated its bottom-up approach and the importance of understanding the fundamentals of the business.

Foord currently has a positive outlook on the global economy, saying they’re happy with conditions in the US, Europe is starting to look better and although China is slowing, it is still growing. “Noise affects sentiment. It stalls investment which creates volatility,” said Mike Soekoe. The company expects these economies to improve after another few months of volatility. Dodge & Cox agreed with Foord’s view of the global economy, stating that a country’s economy is more important than its politics.

The rising tech industry

Dodge & Cox currently sees a number of investment opportunities – some value-driven (e.g. Hewlett-Packard), which are generating free cash flow and some on growth prospects, e.g. Alphabet (Google), which is reasonably priced but no longer cheap.

Alphabet is also one of Foord’s biggest holdings. Mike Soekoe highlighted artificial intelligence, driverless cars and robotics as examples of the type of technology diversification that investors can’t access in SA. Dodge & Cox sees Naspers as a value stock rather than a technology stock and believes the company will continue to grow, having strong internet properties around the world.

The 18 trillion USD debt problem

“There’s been a lot of focus on this,” said Mike Soekoe, “but household wealth alone in the US is around $80 trillion. America is a very wealthy country and we don’t see this figure as a major stumbling block.”

BlackRock agreed, stating that US households have done a lot to improve their debt levels over the last few years. “Large corporates in the US are also in good shape,” said Kevin Johnson. “Consumers and corporates are strong. It is government debt that is the lowest quality, and we don’t have much exposure to government debt. An increasing percentage of the federal budget is spent on things with rising costs, e.g. healthcare, and it’s not politically feasible to cut this spending right now.”

A closer look at the portfolios

Foord highlighted insurance companies and banks in China as an interesting part of their portfolio. Consumers in China are becoming wealthier and want to save for the future. They also cite short-term insurance as a market with a lot of growth potential in China.

BlackRock singled out financials, saying that US firms are in a much improved state since the global financial crisis. “They’re looking more like utility-type businesses with a regular revenue stream,” said James Brown.

Dodge & Cox sees BR Malls, a Brazilian shopping mall owner, as a good investment opportunity, mainly based on their strong management structure and the fact that they are well positioned to take advantage of future potential growth.

The strong US dollar

Foord and BlackRock agreed that the impact of the lower oil price on the fracking industry had caused job losses in Texas and other oil-producing areas of the USA, impacting spending and corporate profits. “But the fall in the oil price has benefitted other parts of the economy,” said James Brown. Mike Soekoe added that there’s generally a pick-up in global growth in the years following a drop in the oil price. “Our view is the strengthening of the dollar is about done,” he said. “As the US picks up, Europe will pick up and the currency will stabilise. We don’t see another 30% appreciation.”

Risk management and emerging market exposure

Dodge & Cox sees diversification as the main means of limiting risk and won’t go more than twice a particular index weight in any specific sector. “Emerging markets make up about 17% of our global portfolio; we wouldn’t go much above 25%,” said Kevin Johnson.

BlackRock aims to provide clients with a less volatile experience of the markets by not having more than 5% exposure to any particular company.

Developed economies versus emerging markets

“We still like the US,” said Mike Soekoe. “With interest rates normalising in the US and demand in China slowing, the emerging market theme is no longer as enticing to investors as it was previously. However, we remain positive on China because of the growing population.”

BlackRock’s James Brown said that investors tend to gravitate towards a few high quality businesses in emerging markets. “We see emerging markets as more attractive and cheaper. But even though the market is cheap, the number of companies we’d invest in, is small,” he said. “It all comes down to the hunt for yield.”

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