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SIMON BROWN: I’m chatting with Herman van Papendorp. He is Momentum Investments’ head of asset allocation. Herman, always appreciate the early morning insight. You and I chatted last year. We were talking about emerging markets versus developed markets. You were very much in favour of the emerging market, and certainly that is what we saw in 2025: in both home currencies and, frankly, in US dollars it did incredibly well.
If anything, in a note you put out early this year what we are seeing enhances that. I’m thinking of the US military action in Venezuela, which adds to geopolitical uncertainty and the US threats to the Fed chair independence over the weekend. The case for emerging markets is growing, or perhaps the case against developed markets is fading – whichever way we want to look at that coin.
HERMAN VAN PAPENDORP: Morning, Simon. Yes, I think definitely so. This is just a continuation of what we saw last year in terms of Trump policies.
Trump policies last year very much related to economic policy. Remember all the trade tariffs that he put in place, and so forth. But this year he has increasingly started focusing on foreign policy. He was very aggressive on foreign policy.
The incursion into Venezuela is one more example of this, and it is telling us that the broader investment environment is one that says that you have to be very careful as far as the US is concerned. If you see that as a less reliable investment destination, then other investment destinations become much more interesting to invest in. Obviously emerging markets feature in that – and South Africa as well.
Interestingly, we said that the Trump [approach] strangely and ironically enough was positive [for] South African markets last year. It was positive for equities because it was because of this thinking by global investors that we should perhaps put some of our future money less into the US and more into non-US markets – including emerging markets, including SA.
SIMON BROWN: There is value in those markets. The emerging markets are different, depending on the territories, but broadly there is value. The investment sentiment has been US-centric for, I don’t know, five years, a decade maybe, and EMs have lagged.
HERMAN VAN PAPENDORP: Yes, definitely. As you rightly point out, that is reflected in valuations. If you look at emerging-market valuations relative to developed-market valuations, they are trading at levels that are below historical levels. So again, they look cheap – emerging markets versus developed markets. And then if you look at South Africa now, South Africa is trading at one standard deviation cheap relative to emerging markets. You can just think about how cheap we are to develop markets.
So I think it’s all-in-all a situation where investors are saying, listen, the US may not be the sort of the risk-off environment that we need to be in. We would rather want to be in a less risky environment – where emerging markets are now seen as less risky than the US. That’s quite ironic, but this is what Trump has brought to the party through his policies.
SIMON BROWN: And that’s what we have seen. And foreigners – if we think locally, they certainly have been buying our bonds; and they’ve done very well by buying our bonds. It’s the equity that we need to start seeing and it will happen. But my sense is that it’s a process. This isn’t something that turns on a dime.
HERMAN VAN PAPENDORP: No. we always say bond investors are like investment tourists. They come in and go out very quickly. Equity investors are a little more medium-term focused, so they need to be comfortable that the fundamentals underlying the companies that they invest in are improving. And therefore that’s also linked to the macroeconomic environment.
But I think all of the factors that we’re seeing in South Africa [are] that we’re moving from 0.5% growth in 2024 to maybe 1% and a bit in 2025, and maybe closer to 2% in 2026.
That momentum and that delta, the change in momentum in growth economically locally in SA, is probably going to induce some interest, particularly after such a strong period of equity-market performance by South African equities. We also need to know that there is a bit of a recency bias among global investors who don’t look at all markets in a very elaborate way on a continual basis. So when they start seeing that countries or companies that they haven’t looked at for a long time, like South African companies, suddenly perform exceptionally well, then they say, mmm, maybe it’s time for us to spend a little more time on this specific market and these companies in those markets, and maybe let’s commit some time firstly, and then secondly maybe commit some capital as time goes by after they’ve done the analysis.
Again, that takes time. It’s not like a bond-market investor that will come in quickly and go out quickly again.
SIMON BROWN: I take your point there. The trend is right; the underlying fundamentals are moving in the right direction and equity will come. But it is going to take them a minute or three.
We’ll leave it there. Herman van Papendorp, Momentum Investments’ head of asset allocation, I appreciate the early morning.
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