This week's featured ETF is Satrix Inflation Linked Bond (ILBI) ETF. This fund is suitable for investors with a low risk appetite seeking exposure to SA government bonds.
To know the investment approach and its portfolio composition, here's the link to the full feature.
Dividend Yield
- 1.98%
Highlights
- Investors should not turn a blind eye to inflationary risks just yet.
- SA is vulnerable to oil price shocks
- Inflation may not cool off as quickly as markets anticipate.
- 37.1% - Inflation-Linked Bonds 12+ years
- 19.6% - Inflation-Linked Bonds 7-12 years
- 14.4% - Inflation-Linked Bonds 3-7 years
What’s happening in the markets?
After a bruising 2022, markets have begun 2023 on a stronger footing, with the S&P 500 and the JSE All Share Index starting the year in positive territory.
While inflation may have peaked, it is likely to remain elevated over the short to medium term on the back of energy costs and lingering supply chain disruptions. This week we are reviewing the Satrix Inflation Linked Bond (ILBI) ETF as we believe investors should not turn a blind eye to inflationary risks just yet.
Investment environment
Firstly, the International Energy Agency stated that China’s reopening will boost global oil demand this year to a new record high. The higher demand, coupled with sanctions on Russia, could outweigh supply and send prices higher. Morgan Stanley forecasts Brent crude oil to rise to $107/bbl from the current level of $84/bbl by 2023-end. A small economy such as SA is vulnerable to oil price shocks due to the volatile exchange rate and reliance on the commodity. If Morgan Stanley’s forecasts on oil prices are correct, SA’s economy will come under pressure from surging prices, implying elevated interest rates for longer.
Secondly, although goods are expected to move more freely in 2023 than in 2022 and 2021, the global supply chain remains fragile. General Motors expects disruptions to continue over the short term. In addition, the automotive manufacturer stated that it will take concrete steps to minimise the disruptions while building resilience. Similarly, while semiconductor suppliers are taking proactive measures to mitigate supply chain challenges, however, they do not expect the disruptions to come to an abrupt end in 2023. This implies that inflation may not cool off as quickly as markets anticipate.
Pent up demand from China might spur inflation not only within the country but also across the globe. Morgan Stanley does not expect inflation to decline sharply by year-end. The investment bank believes that investors’ optimism may be premature mainly because core inflation is sticky on the upside.
In SA headline inflation came in at an annualised rate of 7.2% in December 2022 down from 7.4% in November - with an average annual rate of 6.9% for 2022. The main contributors were food and non-alcoholic drinks as well as transport and housing utilities, which contributed 2.1, 2 and 1 percentage points, respectively.
Several other categories recorded double-digit inflation growth such as fuel (22.8%), oils and fats (22.4%), breads and cereals (20.7%) and public transport (16.7%). Intellidex expects headline inflation to return to SARB’s target range by end 2023. However, inflationary risks remain on the upside given the electricity tariff increase of 18.65% granted to Eskom effective from 1 April 2023.
Households and businesses that purchase electricity from municipalities will likely suffer a bigger increase as local governments tend to add their own markup and rates. As a result, profit margins for companies will be squeezed on the back of higher operating costs coupled with subdued revenues.
SA faces a 45% probability of entering a recession this year mainly due to power outages, according to a survey of economists by Bloomberg. The Bureau of Economic Research believes that the power crisis is unlikely to fade in the short term, ranking Eskom as SA’s biggest downside risk which will drag down growth prospects.
Intellidex forecasts GDP growth of 1.7% for 2023 from an estimate of 2.4% in 2022. Therefore, it is essential for investors to diversify their portfolios to address inflation and growth risks.
The Satrix ILBI tracks the S&P SA Sovereign Inflation-Linked Bond 1+ Year Index. Generally, returns on government bonds depend on multiple factors such as the current account balance, economic growth, political stability, government indebtedness and sovereign credit ratings by S&P Global, Fitch and Moody’s. Any negative effect on one of these factors increases interest payments to be made by the government and therefore increases bond yields to compensate for higher risk.
The Satrix ILBI has returned 6.47% over the past year and 5.44% over the last five years. It has a low total expense ratio of 0.25% and a portfolio size of R520m. Distribution is twice a year with a distribution yield of 1.98%. It is suitable for risk averse investors who want to diversify their portfolios
Satrix Inflation Linked Bond (ILBI) ETF
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Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
Disclaimer
This research report was issued by Intellidex (Pty) Ltd. Intellidex aims to deliver impartial and objective assessments of securities, companies or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments. The information contained in this report is based on sources that Intellidex believes to be reliable, but Intellidex makes no representations or warranties regarding the completeness, accuracy or reliability of any information, facts, estimates, forecasts or opinions contained in this document. The information, opinions, estimates, assumptions, target prices and forecasts could change at any time without prior notice. Intellidex is under no obligation to inform any recipient of this document of any such changes. Intellidex, its directors, officers, staff, agents or associates shall have no liability for any loss or damage of any nature arising from the use of this document.
Remuneration
The opinions or recommendations contained in this report represent the true views of the analyst(s) responsible for preparing the report. The analyst’s remuneration is not affected by the opinions or recommendations contained in this report, although his/her remuneration may be affected by the overall quality of their research, feedback from clients and the financial performance of Intellidex (Pty) Ltd.
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