Apart from a few declines in the local bond and property markets, most ETFs extended their new year rally during February as, internationally, risk-on sentiment which started at the beginning of the year persisted. Investors’ appetite for risk is driven by the US Federal Reserve Bank’s pivot on interest rates, ongoing US/China trade talks and a rollout of Chinese stimulus measures. Those more than offset negative domestic issues including Eskom and SA’s national budget.
The Global view
Global equites climbed during February with most major indices which are tracked by funds listed on the JSE enjoying year-to-date growth of between 6% and 13.5%. The Stanlib S&P 500 Info Tech Index Feeder was the top performer with a return of 12.4% in February, followed by Sygnia ‘s 4th Industrial Revolution, which returned 12.32%. Ashburton Global 1200 was at the bottom of the table with a return of 1.8% during February.
The risk-on behaviour can be credited to several factors. First, the US-China trade talks seem to be progressing well. The US delayed a planned hike in tariffs that was scheduled for 1 March, citing progress in trade talks. Second is the dovish pivot by the US Federal Reserve. Minutes from the Fed’s latest meeting signalled that it was ready to pause in its campaign of steadily hiking interest rates. The UK, Brazil, Mexico and Russia also held their policy rates steady.
Third, Chinese policymakers are implementing a mix of fiscal and monetary measures to support growth. These developments combine to lower the risks that most investors were worried about coming into 2019. However, the flow of company earnings and earnings guidance for the first quarter is telling us something else. In the US, almost three quarters of the 103 S&P500 companies that have issued earnings guidance for the first quarter so far have been negative.
Analysts continue cutting their 2019 earnings targets for US companies. Morgan Stanley analysts lowered their S&P500 earnings growth target for 2019 to 1% from 4.3%. FactSet consensus for the S&P500 was slashed significantly with earnings for the first quarter now expected to decline by 3.4%, a huge drop from a consensus growth forecast of 6% growth issued as recently as November.
Outside of the US, economic and sentiment data releases during February were soft. Preliminary figures show the eurozone GDP expanded by 0.2% quarter on quarter in the fourth quarter of last year, bringing full-year growth to 1.8%, the weakest pace in four years. The latest flash PMI readings also point to a continued slowdown in manufacturing output growth in advanced economies.
ETFs featured
We have split international equities into developed and developing markets:
Developed:
In this category we like the Satrix MSCI World Equity Feeder ETF (up 8.29% in February), and the Ashburton Global 1200 Equity ETF (up 7.03%). They diversify their exposure across the US, Europe, Japan, Canada and Australia. With more than half of the funds invested in US stocks, investors will still have substantial exposure to the US.
Satrix MSCI World beats Ashburton Global 1200 Equity ETF on costs. Other more focused international equity themes include property and technology funds. These are worth considering for tactical or other investor-specific reasons.
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Emerging:
The choice in this segment is limited to two funds: Satrix MSCI Emerging Markets and the Cloud Atlas AMI Big50. The Satrix fund was the best performer last month, returning 4.9% against 3.58% for the Atlas fund. Unlike the Cloud Atlas fund which invests in African stocks only, the Satrix fund invests in a wider range of emerging economies, including some of the fastest-growing markets such as China and India. In addition, the fund is the cheapest within its category, boasting a TER of 0.4%.
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There's plenty more from where that came from. The team at Intellidex have more insights for the month of March. 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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