Stock Picks
Geopolitical tensions, supply chain disruptions, and unseen forces drive equity markets towards an apocalypse of some sort all sounds like a plot from your favorite bond movie, right?
Well, not really, but newbie and sometimes veteran investors must remember that equity markets do not always go up like we have come accustomed to; they tend to correct as well. Stock market corrections are all part of a healthy market cycle and nothing new; yes, the degree of discomfort varies, and luckily there are measures by which we can curb portfolio volatility.
The focus shifts to mitigating some, not all, the risk from an investment portfolio by using other asset classes and instruments like fixed income, dividends, Unit Trusts and ETFs.
Fixed Income:
With the current market correction underway and the S&P 500 firmly in bear territory, we look to asset classes like fixed income and particularly bonds to mitigate some risk. Bonds are good leading indicators of future economic events and essential to a diversified investment portfolio.
Although it should be noted that bonds are not an ideal choice at the start of an economic contraction cycle, like now, and have an inverse relationship with interest rates. So, these local bond picks are pre-emptive, much like our recent note on recession “The R Word” and for when we see an end nearing the contraction of the economic cycle.
With the local economy starting to show signs of life again, with a slew of positive economic data points, from positive trade balance figures, government debt is less than expected, and positive rating agency upgrades, the Satrix SA Bond Portfolio (STXGOV) ETF comes into focus. The STXGOV ETF tracks the performance of the S&P South Africa Sovereign Bond 1+ Year Index, which gives investors exposure to South African Government Bonds. SA Government bonds are extremely attractive locally and internationally due to their high yields.
Another form of hedging one’s risk in the Fixed Income space, specifically inflation risk, is to use Inflation-linked Bond securities like the FNB Government Inflation-Linked Bond ETF (FNBINF). This Inflation-linked bond ETF offers investors a real rate of return above inflation (CPI) through exposure to a diversified portfolio of government inflation-linked bonds. The ETF aims to track the performance of the FTSE/JSE IGOV Index and pays quarterly distributions to investors based on the coupons received within the fund.
Unit Trust:
When looking to diversify a portfolio even further, we can use Collective Investment Schemes (CIS) like Unit Trusts to mitigate market and portfolio risk.
Sticking to the Fixed Income theme, we look at the NinetyOne Diversified Income H (IDICH) unit trust, which has a well-diversified fixed income portfolio of instruments. The fund is actively managed and benchmarked against the STeFI Composite (FTSE/JSE ALBI 1-3 pre- 01/07/2011). Unit trusts tend to attract higher fees than exchange Traded Funds (ETFs) which the investor should note.
The diversified income fund aims to provide the investor with a high level of income while seeking opportunities to maximize capital growth across equity, units in foreign funds, cash, and property.
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Our friends at Intellidex see opportunities across the following asset classes:
Globally, high inflation continues to pressure businesses and consumers' real wage growth, and we expect the strained supply chain conditions to persist. Especially given the continued conflict between Russia and Ukraine fuels our investment perspective that diversification is still crucial.
Income:
CoreShares SA Property Income ETF (CSPROP) Our income pick for this month is the CoreShares SA Property Income ETF (+0.5%), arguably the most diversified of its peers. By tracking the custom-made SA Property Income Index, the top 10 shares account for only 65.8% of the ETF's total assets compared to an average of 77% by its peers, the 1nvest Property and Satrix Property ETFs.
It is also reasonably priced, with a TIC of 0.48% and a dividend yield of 6.8%. The risks of holding listed-property are clear given the pandemic, work-from-home trend, and locally, SA's anemic growth prospects.
However, the fund includes companies with diversified exposure offshore. In addition, Anchor Capital forecasts a 7.2% yield and 10.4% total return for the local listed property sector in 2022. Finally, we believe that it is pretty helpful for diversification purposes.
Data from the SA Reit Association indicates a correlation coefficient of 0.49 over the last five years to end-April (between SA-listed Reits and the FTSE/JSE All Share index). This implies a weak-positive co-movement between share prices of REITs and the broader market, a plus for diversification purposes.
Dividends:
CoreShares S&P SA Dividend Aristocrats ETF (DIVTRX) The CoreShares S&P SA Dividend Aristocrats ETF (-1.7%), this month's dividend pick, tracks the performance of the S&P SA Dividend Aristocrats Index. The index includes companies that have grown or maintained stable dividends over the past seven years, with any decline in a payout not exceeding 3% of the previous year. While it has a decent historical yield of 8.1%, it is expensive, with a TIC of 0.73%.
The ETF includes companies such as coal mining and exporter Exxaro Resources, which has grown its total dividend (including special payouts) by 50% compounded annually since FY16. As such, we believe that this fund is beneficial, particularly for income-oriented equity investors.
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Informed decisions
At this point in the economic cycle, it might not be the opportune moment to invest in bonds seeing as higher yields and rate hikes are pushing bonds lower. But the picks in this research note could empower the new and seasoned investor with opportunities when the tide does turn. Also the term “Cash is King” comes to mind at the offset of uncertainty as the investor should earn interest on cash while waiting to pounce when buyers return to the market.
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Sources –EasyResearch, EasyETFs, Bloomberg, FNB, NinetyOne, Intellidex.
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Barry is a market analyst with GT247, with a wealth of experience in the investment markets. Now in his tenth year in the markets, Barry "The Beef" Dumas brings a combination of technical analysis and fundamental insights to the table.
