The first quarter of 2019 was somewhat contradictory. Concerns of a slowing global economy and trade tensions, which caused much volatility, were overshadowed by some of the best equity performances in recent memory, both at home and offshore. It was the best quarterly gain for the S&P500 since 2009, which climbed 13.1% -- albeit off a low base created in Q4 of last year when investors sold off extensively. Similarly, the JSE all share index gained 7.1%, marking its best performance in a given quarter since 2007.
The Macroeconomic view
Locally, the sluggish economy, deteriorating government finances, elections-outcome uncertainty, load shedding and the extent of the rot at Eskom coming to light, are some of the primary factors flashing warning lights for local equities. Even international rating agency Moody’s was wishy-washy with its opinion on SA, but maintained an investment grade rating, though we get the sense that it is kicking the can down the road.
However, rand hedges could provide some respite. Naspers, which accounts for more than a fifth of the local market, is on a path to unlock more value – following its successful unbundling of Multichoice – through separately listing some of its assets in Amsterdam.
The FNB/BER Civil Confidence Index, which measures construction activity, hit its lowest level ever recorded of 10 points in the fourth quarter of last year. Similarly, the Absa Purchasing Managers Index fell to 45.0 points in March from 46.2 in February, the third consecutive month of decline. As such the Satrix Fini ETF was the biggest loser, declining 4.81% in March.
In commodities, Standard Bank Africa Rhodium ETF climbed 20.62% in March as policy developments in Europe and China continue to drive its demand. However, the two palladium funds gave up some of their gains of recent months, shedding more than 7% each in March.
The Satrix SA Quality ETF remains our preferred choice. The ETF selects constituent companies using a set of quality metrics, including return on equity, liquidity and leverage. The top 20% of all JSE-listed companies with the highest scores based on those criteria are included in the fund and weighted by market capitalisation but capped at 10% of the fund.
Empirical evidence shows that portfolios sorted on factors such as profitability and earnings quality generate high risk-adjusted returns relative to a market portfolio. However, the size of the premium varies, depending on the metrics used to calculate the quality score. The Satrix fund is a perfect fit for our 2019 outlook of a volatile equity market. It lost 0.59% during March.
Adding a commodity ETF to your portfolio improves diversification because commodities march to the beat of their own drum when compared with broad markets, which makes them an excellent portfolio diversifier.
Traditionally, gold is the preferred addition to an investor’s portfolio because over longer periods it has shown to be the least correlated with other assets. However, our preference based on our medium-term outlook is between rhodium and palladium. The new vehicle emission laws in Europe and China are driving demand for both commodities and this is expected to continue in the foreseeable future.
We are slightly more inclined towards rhodium (Standard Bank Africa Rhodium ETF) because it is scarcer, with lower extraction rates from PGM ore. The primary production of rhodium is somewhat inelastic and is expected to decline moderately over the medium term. However, gaining exposure to both commodities is not a bad idea.
There's plenty more from where that came from. The team at Intellidex have more insights for the month of April. To see more in-depth analysis and market insights (global and local), check out the full note here.
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
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