4 ETFs to Warm Up July

Intellidex ETF Picks

Intellidex is back with a vengeance and these ETF picks could just kick start your portfolio during these uncertain times and beyond!

Here are the Intellidex top Equity ETF picks:

Domestic Equity

Satrix Top 40 (STX40) and Satrix FNB MidCap (FNBMID)

South Africa’s increasingly weak economic conditions and concerns about global inflation and monetary policy led to a sharp pull-back in local equities. Resource shares, which performed quite strongly in Q1, have since given back their gains as commodity prices declined due to concerns about global economic growth. As such, we once again remain of the view that broad exposure to SA equities is arguably the best way to make an allocation to the local market. However, our pick for this month is the Satrix Top 40 ETF (-6.5% in May).

Our pick is informed by the view that the decline in share prices has made SA equities a bit cheaper, which is always a better entry point than timing the market. Given that mid-cap equities have also become cheaper, the differentiating point is that a few top 40 companies generate earnings offshore, where prospective economic conditions are relatively better than in SA. However, our second pick is for investors that believe “SA-Inc” shares have the ability to successfully trade through the tough economic conditions ahead. The FNB MidCap ETF (-7.3%) exposes investors to mid-sized JSE-listed companies. It is dominated by financial services and consumer-related companies, that account for almost 60% of the ETF.

As such, Moody’s affiliate GCR Ratings expects rising interest rates to support reasonable loan growth for banks and non-interest fees to be supported by fewer lockdown restrictions. Regarding the consumer, we expect rising inflation and high competition among retailers to increase promotional activity among consumers.

As such, everyday low-price retailers such as Mr Price are well-positioned to provide value to customers. Given that they can manage costs, we expect stable earnings and cash generation to underpin their performance - thus benefitting the ETF and investors.

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Foreign Equity:

1nvest S&P 500 Index Feeder (ETF500) and Satrix MSCI EM Feeder (STXEMG)

Our core global equities pick for this month is the 1nvest S&P500 Index Feeder ETF (-5.3%) which tracks the performance of the S&P500 (in rand) by investing in the iShares Core S&P 500 Ucits ETF. The S&P500 index provides investors with exposure to the performance of the top 500 leading US-listed companies and captures approximately 80% coverage of available market capitalization. At the end of June, the S&P500 was trading at a forward price: earnings ratio of 15.9x, which is lower than its 25-year average of 16.9x, according to data from JP Morgan Asset Management. Moreover, while revenue and earnings should be lower this year, JPMorgan expects pricing power (which leads to higher profitability and earnings) to be the main driver of share prices.

Given that UK and European equities have higher weights in energy and raw materials, these indices have been more resilient. However, they are also more vulnerable to energy disruptions, which adds risk to profitability margins and earnings. As such, JP Morgan favors exposure to consumer companies that may have exposure to middle-to-higher income customers, where disposable income may be a bit more resilient, especially in the face of higher prices.

The 1nvest S&P500 Index Feeder ETF is dominated by consumer and business giants Apple and Microsoft, known for their notorious ability to lock customers into their product ecosystems with their established brands.

Our second pick is the Satrix MSCI Emerging Markets Feeder ETF (-2.9%), which provides investors with exposure to emerging market equities. Negative sentiment towards China, the biggest component of EM equities, includes the recent lockdowns, a crackdown on technology firms, and concerns about its overheating property market. However, given China’s relatively low inflation (2.1% annually in May), JP Morgan expects Chinese authorities to provide gradual monetary and fiscal stimulus to the economy, which bodes well for equities. Its data show that credit growth, which is positively correlated with Chinese equity performance, is starting to rebound. Data from local fund manager Anchor Capital, also show that Chinese equities are relatively under-valued to their developed peers. We believe that exposure through this ETF plus the attractive valuation provides a margin of safety for investors.

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Outlook

Current economic and investment conditions are tough. As such, we think the volatility we previously expected in global equities will remain for at least the rest of 2022. On the flip side, any signs that central bank efforts to subdue inflation are bearing fruit may lead to a turn in investor sentiment, which would send equity markets higher.

In the meantime, however, our ETF picks are once again made with a diversified portfolio in mind. This will enable investors to stomach the volatility and short-term losses that may ensue from current conditions. Encouragingly, the recent sell-off means that some sectors and parts of the market have become cheaper, which may reward investors willing to take advantage.

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Read: Market Uncertainty ETF Picks

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Background: Exchange-traded funds (ETFs)