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Blue Chip Issue 78 - Jan 2021

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OFFSHORE INVESTING

OFFSHORE INVESTING Emerging markets Why you should consider other emerging markets (EMs) when investing offshore Don’t let historical biases put you off investing in other EMs. Throughout the 2010s, there were long periods when moves in EM currencies, which include the rand, were highly correlated. Given our history of foreign exchange controls, many investors concluded that it’s a waste using up scarce global exposure to invest in other EMs. As a South African, it is true that your access to global investment opportunities is still normalising. While government continues to liberalise exchange control, some restrictions remain. However, the correlation between EM currencies broke down in 2020, primarily due to much better management of Covid-19 in Asia. In addition, increasing political instability in some of the major developed democracies has further undermined the popular notion that developed markets (DMs) are the only option if you are looking for stability and uncorrelated investment returns. Here are the reasons why you should consider a healthy exposure to EM assets, specifically equities, in your global portfolio: EMs are still considerably underrepresented in benchmark world equity indices. 80% of the globe’s population lives in EMs, which now represent half of global economic output, but EM equities make up less than 20% of the global benchmarks frequently tracked by investors. Economic and demographic dynamics suggest that EM businesses will have, in aggregate, higher earnings growth than DMs and this should allow stock exchange market caps to grow faster than DM caps, ultimately increasing their relative size. Investors in EMs stand to benefit from a demographic tailwind not found in DMs. Just think, the Chinese upper middle class is roughly the same size as the US middle class and the Indian middle class is approaching the size of the European middle class – and if current growth rates are maintained, both are set to become significantly larger. Also, many industries in EMs are not as developed or consolidated as their equivalents in DMs, which gives them longer runways for earnings growth. Given local political and cultural requirements, local champions are more likely to remain the big beneficiaries of technological disruption in their home markets. There have been deep structural changes in the compositions of EM stock markets. Back when Coronation launched its first EM fund in December 2007, more volatile commodity-producing countries heavily dominated the EM universe, with energy and commodities making up more than 40% of the index market capitalisation. Now, however, the combined weight of China, Taiwan, Korea and India – none of which are particularly commodity dependent – are almost 75% of the total EM universe. Putting all these factors together, we believe there is a convincing argument in favour of including EMs in your global investment exposure mix. Investing in EMs through the Coronation Optimum Growth Fund. You can gain access to EMs through investing in Optimum Growth, a long-term portfolio of the best investment ideas Coronation can find around the world. The fund is unconstrained, so it can invest anywhere in the world and across all available listed asset classes. It currently has 70% exposure to equities, which in turn consists of 45% EMs and 55% DMs. Optimum Growth is managed by an exceptionally accomplished investment team, which decides on the optimal allocation between growth and income, as well as EM and DM assets. The fund is aggressive and aims to achieve a long-term return of at least 5% above inflation, so it is best suited to those investing for periods of 10 years-plus and willing to deal with a higher level of risk than a classic 60/40 global equity/bond multi-asset portfolio. The fund’s average historical equity exposure was between 70% and 80%. So you shouldn’t expect this fund to deliver a smooth double-digit annual return, but, if you are seeking meaningful real wealth creation and you are patient, then Optimum Growth could be the right fund for you. Here is how it has performed over time: More than double the index over 20 years. Investors who have remained in Optimum Growth since its launch in 1999 have achieved returns more than double that of the MSCI World Index at end November 2020. As the fund marked its 21st birthday last year, it was certainly something for them to celebrate. Can this performance be repeated over the next two decades? The same factors that have driven the remarkable performance of Optimum Growth remain in place at Coronation today. For 27 years, the company has remained single-minded in the pursuit of creating wealth for clients, while responding to ever-changing market conditions with acuity. Active long-term investing is about focus, agility and conviction. While no-one can predict the future, when it comes to investing, you can prepare by building robust and resilient portfolios. To find out more about investing with Coronation, visit www.coronation.com The information contained in this article is not based on the individual financial needs of any specific investor. Reference to specific funds should be read in conjunction with the minimum disclosure documents available on www.coronation.com. To find out more, speak to your financial advisor. Coronation is an authorised financial services provider. 50 www.bluechipdigital.co.za

ailout blackout Brexit Despite the world’s biggest headlines, our Optimum Growth Fund has doubled the returns of the global index over 21 years. Start your offshore investment journey by speaking to your Financial Adviser or visit coronation.com today. Coronation is an authorised financial services provider. Please refer to the fund’s MDD for full details.

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