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Intellidex Reviews July 2019: Local ETFs

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Following May’s dismal returns, June’s curtain call saw resource stocks reminding us of their yester-year dominance of the JSE, pulling the all share index up 4.6% to its best monthly performance so far this year. The mining index rose 13.0%, helped by its sub-indices – the gold index which shot up 24.5% and platinum index climbing 14.8%. However, the price of gold itself was only up 4.6% while rhodium and palladium climbed 16.2% and 16.1%.  

This strong performance in underlying resource-heavy assets propelled several local-asset ETFs. JSE heavyweights such as the Anglo-American group of companies saw double-digit stock price returns, with AngloGold climbing 30.5%. However, the strengthening of the rand in June against major currencies ensured JSE-listed international asset ETFs did not benefit much from the global equities rally. Consequently, the equally weighted portfolio of JSE-listed ETFs rose 3.85% while Intellidex’s portfolio was up 3.22%.

The average return on local-equity ETFs was 5.58%.

The Macroeconomic view

For SA the outlook remains poor and Intellidex’s forecast for SA’s economic growth this year is a meagre 0.5%. Besides the various corruption inquiries on the go, President Cyril Ramaphosa’s main achievement since taking the oval office has been the appointment of credible individuals to head key political and economic institutions.

The recent reinstatement of governor Lesetja Kganyago and appointment of a strong interim PIC board is a continuation of this confidence-rebuilding exercise. It also emerged that the PIC wants to convert its debt in Eskom to equity as well as have a say over Eskom’s management, which is potentially positive for SA’s finances. But for economic growth to take off, we need meaningful reforms.

Lesetja Kganyago - Dean Hutton - Bloomberg(Image source: Bloomberg/Dean Hutton)

ETFs featured

Local:

SA’s outlook remains weak and the political economy is in too much discord to inspire investor confidence. As such, sticking with the tried and tested stocks is important. The Satrix SA Quality ETF selects constituent companies using a set of quality metrics, including return on equity, liquidity and leverage. Such stocks tend to be resilient to economic shocks and volatility. The ETF rose 5.66% during June.

There are extensions to this core local equity exposure that can be added in a tactical sense as a satellite fund. The NewFunds Equity Momentum fund is worth considering. It has performed ahead of other equity funds under both market extremes in the past two months. However, the sample period is too short to draw strong conclusions.

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Commodities:

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 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.

Important note: This ETF does not qualify for a tax-free savings account.

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There's plenty more from where that came from. The team at Intellidex have more insights for the month of July. 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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