Three key investment trends for South Africans

SIMON BROWN: I’m chatting now with Bryn Hatty, CIO at Stonehage Fleming Investment Management in South Africa. Bryn, appreciate the early morning. A recent note out from you and your colleagues is ‘Three investment trends every South African investor needs to understand in 2026’.

The top one is around AI, artificial intelligence. What you’re saying here is not that we shouldn’t be investing, but it’s where we should. Picking winners and new tech is hard, and I remember that from the dotcom crash 20-odd, 25 years ago. Now you’re saying there are other sectors that are going to benefit – not necessarily the obvious sort of high-tech stocks.

BRYN HATTY: Good morning, Simon. Thanks for having me on your show. Yes, I think that the point here is that this is a technology that is going to really change the way the world works. And the temptation is to get sucked into those investments that are kind of at the forefront of that process. But as you mentioned, if you think back to some of the telecom infrastructure giants from the late ’90s, like Nortel and Lucent, they weren’t necessarily the long-term winners. Often the long-term winners were the companies that actually used the technology to make their businesses better or more efficient.

I think that the point is to have a broad approach to businesses that you think will be impacted by the technology over the long term.

SIMON BROWN: I take your point. This would be – I’m picking a random stock – like PepsiCo. You think to yourself they make snacks, they make carbonated drinks and the like but, used well, they could really see a potential benefit from this. And this is where we’re going to find some of those long-term AI winners in very different spaces.

BRYN HATTY: Yes, I think the thing is to look for businesses which can be more efficient or better as a result of the use of AI. One of the areas that I think will potentially be a really good long-term winner from AI is an area like healthcare with drug discovery, where the use of AI can speed up the process of solving some of the more difficult health issues that that occur around the world.

SIMON BROWN: That’s a great point. And certainly we’ve seen a lot coming out already from that.

The other is you talk around risks within passive investing. And this isn’t to diss that passive investing. It does what it says on the sticker – low cost, track market. But part of the challenge is the concentration. The S&P 500 and the Magnificent Seven and our local market – it was all the gold stocks doing the heavy lifting last year. Their concentration is nice on  the way up, but it does add risk to those funds.

BRYN HATTY: Yes, we are big believers in having a balanced approach, so spreading your risk and being diversified. History tells you that in sort of large, heavily researched markets, where pricing is very efficient and very quickly reflects in share prices, such as sort of  large-cap US businesses, it has been very hard for active managers to outperform passive investments. However, we do feel that there is a space for them in less researched areas like emerging markets, small caps, et cetera. the important thing is that investors understand what they’re buying. So what is actually in that passive you’re buying? You may be taking on considerably more absolute risk than you think you are because of these concentration issues that result from the nature of passives – which mostly are marked cap-weighted indices where the larger portion of your investment is going into the biggest businesses, often the businesses that have already done very well and potentially are expensive, and less of your money goes into the smaller businesses that are often cheaper or up and coming.

One of the things that we’ve been doing for our clients is investing using more sort of equal-weight indices, which helps reduce some of that risk, where each dollar you allocate gets equally spread among all the constituents of the index, rather than being market-cap based. That helps you get exposure to some of the cheaper stocks within that index.

SMON BROWN: And it actually works because, as you say, you buy the S&P 500, you get 500 stocks. But seven of them are making up a third or more of that index.

The last [point] is around private markets. I have to say this stat absolutely boggled my brain. In the US, 87% of companies with revenues of over $100 million are privately held. We’ve seen equity markets the world over shrinking, which means the inverse is true. Private markets have been growing. And for investors it means that we need to look beyond just the listed space.

BRYN HATTY: Yes, I think this is incredibly important. The issue you’ve just got to remember here is that private markets are great and we’re a big believer in our clients investing in them. But they do come with their own risks around liquidity, et cetera. You’ve probably followed some of the stories recently with some of the larger names in the private-credit space, like Blackrock and Blackstone and ER Capital – which is probably less of a household name to most people. But these are really big players in the credit markets who recently had to cap their redemptions.

So I think it’s important to know what you’re doing, and it’s important to match the investments you make to your liquidity profile. So if you have assets that you are not likely to need to draw on over the next ten years, then fine, use private markets. But again, make sure that they are appropriately sized in your portfolio. We believe they can add a really nice diversification angle to our clients’ portfolios.

And the point you make is that if you are investing in only the listed or the public markets, there’s a huge swathe of the economy that you are missing out on, to which you’re not allocating globally.

SIMON BROWN: Absolutely. I take your point. Know what you’re doing. I think this is one space where many investors need a lot more sort of assistance in terms of the private market liquidity being the big one.

We’ll leave it there. Bryn Hatty, CIO at Stonehage Fleming Investment Management South Africa, I appreciate the early morning.

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