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Tilman Friedrich’s Benchmarks January / February 2014

Global investment markets have not changed since our previous newsletter. Positive economic trends are still being registered in the US, a number of European countries, Japan and China.
In accordance with the 1741 Asset Management global equity valuations as of December 2013, global equity markets currently present ‘fair value’, with fairly wide disparities between overvalued markets such as the US market (+45%) and undervalued markets such as Japan (-25%).
To achieve superior equity returns, investors would have to find pockets of value outside the traditional developed markets, which would usually be associated with higher investment risks.
Emerging markets have fallen out of favour with investors in developed countries who now prefer to put their money on their own markets, in particular the US market.

 Despite this trend having led to a correction and even to overly optimistic views of equity markets in the developed world, we believe that this trend will persist for a while.
As we have seen, this trend has led to a significant decline of foreign investment capital into the financial markets of developing countries, and a significant depreciation of their currencies. A number of the worst effected countries, including SA, have started to lift their interest rates in an effort to shield their currencies.
The external environment we are facing in SA and Namibia is thus one of continued weakness in our currency, continued upward pressure on interest rates and on inflation as the result of a weak currency paired with sluggish performance of our exports due to a slow recovery in global economies.
This should hurt the local consumer in the first instance. However, the latest national budget released on 19 February, is once again an expansionary budget that should provide a positive impetus to the Namibian economy, deferring the ‘evil day’ by another year. It remains to be seen whether SA will go the same route or whether it will be more cautious.
As pointed out above the global economy is expected to grow by around 2.5% in 2014, including generally higher growth of emerging economies, offset by lower growth of developed economies, where the demand for our goods and services is primarily derived.
Offshore equity markets can therefore not be expected to produce any fireworks but should show some growth, in the US supported by the Fed’s monetary policies up to the point where US economic growth and the support of its equity market becomes self-sustaining.
Our expectation is that these markets should produce real returns of between 5% and 10% in 2014.
In summary, the investor should thus not expect returns on equities in the medium term to be anywhere close to what we have seen over the past few years since the financial crisis and before the financial crisis.
Due to the over-extended weakness of our currency, we believe it is currently not the opportune time to invest offshore but to hold onto any offshore investments.
On the basis of the global economic environment and our expectations of global financial markets we retain our investment call on a globally well diversified portfolio, comprising of value companies in the industrial, financial and technology sectors with strong cash flows and high dividend yields.
Resource stocks, having been in the doldrums since their peak in May 2008, should also offer buying opportunities despite our expectation of muted global commodity prices.
 Listed property is likely to track the performance of equities in the short-term, implying short-term opportunities but is likely to feel the impact of an increase in interest rates more severely than equities.
Pension fund members and the typical local investor would generally hold the major portion of his or her assets locally.
In terms of the weighting of the equity exposure we therefore believe that the local investor should, as a matter of principle, maintain an ‘overweight’ to foreign investments in general, and to foreign equity more specifically.
This asset class should deliver returns superior to other conventional asset classes.
Download the complete Benchtest fund investment overview for January 2014 at

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