Intellidex ETF Picks
The changing investment environment brings new opportunities and whom better to give us a market round-up than the investment gurus at Intellidex, check it out INVSTRs!
The investment environment
Covid-19 remains a major investment theme, with vaccine updates and new variants coming to the fore, locally, and globally.
In South Africa, the trade balance for February printed better than expected at R29bn. This was higher than both Intellidex’s and consensus’ expectations of R23.4bn and R22.1bn respectively. Both export and import growth surprised to the upside – printing at +17.5% year-on-year (YoY) and +4.0% YoY respectively, from +9.4% and -5.7% previously. After the seasonal low in the January data, we can see that we are roughly back to where we were in December.
The Absa Purchasing Manager’s Index (PMI) for March ticked up more than expected from 53.0 points to 57.4. The PMI is an indicator of the direction of market and economic conditions (i.e., are they consistent, expanding or contracting). It is calculated as a weighted average of business activity, new orders, employment, supplier deliveries, and inventories. The uptick in March was the third in consecutive months, supported by an improvement in all subcomponents relative to February, with only the employment index remaining below the neutral 50-point mark, thus pointing to economic expansion.
The narrative of economic expansion was also supported by vehicle sales data for March, which surprised to the upside with YoY growth of 31.8% from -13.3% in March last year. It was also an 18.4% increase over February this year. Many brands indicated insufficient stock to meet demand for new vehicles, which indicates a recovery. However, we cannot shy away from other issues, such as electricity shortages, that continue to negatively affect SA’s investment case and the economic growth.
Globally, markets have been driven largely by optimism about an economic recovery as vaccine programs gain momentum. More than 689-million vaccines have been administered across 153 countries as of 7 April, which is roughly 16-million doses a day. In the US, 169-million doses have been administered and now more people have received at least one dose than have tested positive for Covid-19. It is estimated that 75% of the US population will be covered by June. The pace is slower in other areas, though. The UK has fully vaccinated only 8.2% of the population. Solid US jobs numbers recently provided a boost for the equity markets. The US economy added 916,000 jobs in March, which represents the best performance since August 2020. We expect this to boost equities markets as it reflects increasing business activity. It also beats market expectations of 182,000 jobs by a wide margin.
Further stimulus packages and supportive economic policies supported markets despite increasing trade tensions. In the US, barely a month since President Joe Biden announced a third Covid-19 package of $1.9tn, he announced a further $2.2tn package focused on infrastructure and job creation. This will focus on clean energy and a cleaner economy, which bodes well for electric vehicles and commodities, especially the platinum group metals (PGMs) including rhodium and palladium that are used in catalytic converters.
However, this momentum was somewhat offset by increased trade tensions. The US announced sanctions against Chinese officials over alleged human rights abuses in Xinjiang, Beijing. Its allies – the EU, Canada and the UK – followed suit. In retaliation, China issued its own sanctions against these parties. This does not favor western companies that can potentially be excluded from the second-largest economy in the world, with the likes of H&M closing its stores in China while Nike also saw investors taking fright at the potential impact on its Chinese business.
The Intellidex favorites:
The increased focus on clean energy and a greener economy is further stimulating PGM prices (including palladium and rhodium). Major economies such as China and the EU continue to tighten carbon emission regulations and now the US has also committed to clean energy. This coupled with supply constraints in SA (load-shedding plus lack of investment in mines) is set to continue driving demand for PGMs. Both rhodium and palladium have rallied strongly as demand exceeds supply – early this year we saw the rhodium price exceed the $20,000/oz mark. Oil also advanced strongly, breaching the $70/barrel level in March, from $18/barrel in 2020.
The Satrix Resi ETF (+2% in March) offers a diversification opportunity to investors looking to rotate out of tech shares, which have come under pressure under rising bond yields as well as threats of higher US tax rates and to even delist tech counters from US exchanges for non-compliance with accounting standards, among other things. A drawback of the ETF is the lack of diversification as its constituents tend to behave in the same way, doing well during a commodity boom but suffering during a cycle downturn. For this reason, the ETF is suitable as an addition to an already diversified portfolio (one that already has equities, bonds and cash), and for an investor who will remain invested through the cycles. The fund follows a market-weighted strategy and is affordable, with a total expense ratio of 0.42%.
For an investor looking to invest in cheap, SA focused stocks, a case could also be made for the battered financial sector valuations – the Satrix FINI 15 (+1.2%) would be an ideal vehicle. Investors can also position portfolios to benefit from implementation of economic reforms through the Satrix INDI 25 ETF (+2%), which has holdings in consumer-facing and industrial companies. These are ideal for risk-tolerant investors with a long-term view.
Developed markets equity:
The global economy is expected to rebound to growth of 5.5% in 2021, driven largely by success in vaccine rollouts and curbing the virus’s spread. SA is expected to rebound to 3.3% growth in 2021 before settling on a long-term average of only 1.6%. The US is expected to reach 2019 levels of economic activity this year, growing 5.1% in 2021 and 2.2% in 2022. This will be driven by continued stimulus packages and supportive monetary policy – the US Federal Reserve has lowered interest rates to stimulate growth.
For an investor looking to diversify from the local economy and hedge against rand weaknesses in the long term, the Sygnia Itrix MSCI US ETF (+1.8%) is well positioned. What we like about this ETF is its exposure to diversified industry market leaders such as Microsoft, Apple and Tesla.
China is expected to spearhead an economic recovery among developing peers, with 8.1% GDP growth forecast for this year. This is premised on its significant state-led investment drive, central bank liquidity support and effective Covid-19 containment measures. Also noteworthy is the fact that China was the only economy that had positive growth in 2020.
The Satrix China ETF (-7.7%) is ideal for an investor who wants access to the second-largest economy and wants to diversify from the anemic local growth. A drawback is the potential downside to the economic forecast, emanating from continued pressure in trade relations between China, the US and EU.
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Dividend & Income-themed funds:
For investors who rely on investment income to fund day-to-day expenses, an allocation of a portion of their portfolio to ETFs that pay high dividends may be useful.
We like high dividend yield strategies: Satrix Property ETF (+1.9%) and the CoreShares SA Property Income ETF (+6.0%). Covid-19 has been especially tough on an already struggling local property sector.
Although property funds face an uncertain future in the short to medium term, they have derated and provide a good entry point for investors. Further evidence indicates a sector recovery, with the SA Property Index up 26.3% in the year to end-March 2021. What we particularly like about the property sector is that it is a reliable income stream as real estate investment trusts (REITs) are required to distribute 75% of their distributable income, and it is an investment that is backed by a physical asset.
Bonds and Cash funds:
While boring, investing in the money market is arguably the safest when it comes to capital preservation, but investors tend to shy away because of the extremely low returns. Coupled with its highly liquid form, a money market instrument is ideal for low-risk investing. But such an investment means missing out on the market’s best days, which can severely prejudice overall portfolio returns over the long term.
Reasons for investing in money market instruments include the need to be liquid on an ongoing basis as well as some investors’ discomfort with high volatility as experienced in the equities markets. Whatever the reason, we think that the 1nvest SA Bond ETF (-2.5% in March) is an ideal vehicle with a quarterly dividend income stream.
An alternative is the Absa NewFunds GOVI ETF (-2.5%), but this is a total return fund which means any distributions are reinvested into the fund and not paid out to the investor. These are suitable for investors with a medium to long-term investment horizon (usually more than three years). For short-term investors, usually less than a year, the NewFunds TRACI (+0.3%) is the appropriate investment vehicle.
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If you find the process of diversifying your portfolio daunting, two ETFs will do it for you. They combine equities and bonds to produce a diversified portfolio for two investor archetypes with differing risk appetites:
NewFunds Mapps Protect ETF (+0.2%) is more conservative, usually suitable for older savers.
NewFunds Mapps Growth ETF (+1.6%) suits investors with a longer-term horizon. Notably, both funds invest in SA-listed assets, thus lacking an offshore allocation.
Palladium prices took a knock at the start of the pandemic due to the closure of vehicle manufacturing plants. However, as demand subsequently contracted, Covid-19 restrictions on mining in SA reduced supply, resulting in price recovery. Prices have continued rising, driven by the following: global economic recovery, especially in China; increased investment in renewable energy and electric vehicles; and disruption in supply.
SA is the world’s largest supplier of PGMs. Supply constraints stem from operational difficulties at mines due to lack of investment, policy uncertainty as well as disruptions in electricity supply. Anglo American Platinum (Amplats), the world’s number two PGM supplier, experienced problems with its converter plant, taking up to 600,000oz of PGMs out of the market in 2020.
We believe that in the long term, volume growth for palladium will be driven by electrification in the global automotive industry. We like the Absa New Palladium ETF (+10.4%), which is backed by physical palladium.
We believe investors should remain in well-diversified portfolios. However, we expect global growth to exceed local growth and prefer a healthy portion of portfolios to be in global assets.
The pace of the local economic recovery will depend on the pace of vaccinations and any further waves of infections. As SA lags its developed counterparts in terms of vaccinations, we think offshore assets need to be added tactically when the rand strengthens given that, historically, the bulk of the returns have been due to the weakening of the rand.
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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
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