- A long-awaited upturn in political and economic sentiment in South Africa has resulted in a stronger rand.
- This means South African investors can get more bang for their buck when they buy international companies.
- Old Mutual Wealth thinks a globally diversified portfolio should include defensive stocks like Nestlé and Johnson & Johnson.
The rand has seen strong gains since 'Ramaphoria' hit South Africa at the end of last year. The stronger rand means local investors will get better value when they invest abroad. “If you invest offshore now, you do it from a position of rand strength,” says to Investec Asset Management’s co-head of the 4Factor global equity team, Rhynhardt Roodt.
But the strong rand is not the only reason for investors to look outside South Africa.
While South Africa's growth rate is improving, its actually still lagging behind its emerging market peers. A globally diversified portfolio will help to mitigate the low growth rate in South Africa and the expected underperformance of local markets, says Head of Old Mutual Wealth's Private Client Securities, Chris Potgieter.
Potgieter believes food and agriculture companies in particular offer good, defensive opportunities during times of uncertainty. Here are his reasons:
- People have to eat and food is constantly in demand, even in economic downturns. Defensive stocks in food and agricultural stocks provide investors with smoother, somewhat guaranteed returns and are subject to less cyclical trends.
- Increased use of tech in the food and agricultural sector. This could be a significant driver in future. Potgieter says the application of technology in improving the global food and agriculture value chain has resulted in falling operational costs and wastage, thus increasing outputs.
- Growing global population. More people mean more food is needed. And as the middle class continues to grow across the globe, so is “the demand for high calorific consumption per person.”
Here are 5 of Old Mutual Wealth's global defensive stocks picks:
Nestle is the largest food and beverage manufacturer in the world and boasts a broad portfolio of products. The benefits of scale are arguably most evident within the consumer staples sector where returns on capital are consistently high, cash flow generation is impressive and new entrants into the sector are rare. As a result, Nestle should be a solid long-term defensive counter.
2. Johnson & Johnson
J&J is a vast and diverse healthcare giant. Given the diversification of their products, which include consumer products, pharmaceuticals and medical devices, J&J is well insulated from downturns in the economy, offering a defensive growth opportunity with a stable and likely growing dividend.
As the world’s largest beer company, the group enjoys leading market positions in the most important beer regions in the world, earning nearly 50% of all the profits in the global beer market. When times are good, people drink and when times are tough people drink more, as a result ABInbev is viewed as a defensive, consumer staple business.
As the largest global medical device manufacturer, Medtronic is not heavily reliant on a specific device or segment. Additionally, the group has extensive geographic reach, which best positions it to benefit from long term trends such as ageing populations in developed markets and increased disease burdens in developing markets.
About 65% of Danaher's revenue is generated from consumables (rather than equipment sales) that serves a diverse range of industries. Consumables are recurring in nature and result in customer stickiness making the business defensive.
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