Research Portal

Intellidex Reviews June 2020: in the News

/
Intellidex-Covid-News-June-2020-EasyEquities

The market has rallied, fuelled by accommodative fiscal and monetary policies combined with the reopening of economies. The international Monetary Fund (IMF) estimates that more than $9tn has been pumped into economies through fiscal support mechanisms since the outbreak of Covid-19 to provide relief to affected companies and consumers. Further liquidity has also been released by central banks, with some rolling out unprecedented policy measures.

With so much liquidity in the system, risk assets are bound to rise. But a major driver of the rally in June seems to have been further easing of economic restrictions. In SA, the government moved to level 3 at the beginning of June and then to the so-called advanced level 3 during the second half of June, which effectively opened up almost all economic sectors.

Even the hospitality sector is now open, albeit with some restrictions. In the US, several states reopened, though businesses are almost universally under restrictions, such as allowing fewer customers, requiring workers and customers to wear masks and enforcing social distancing. Europe is opening swiftly and by mid-June it had opened many of its internal borders.

The easing of lockdown regulations is obviously driving economic activity. Locally, the business activity index of the Absa Purchasing Managers Index (PMI) for May rose sharply to 43.2 index points, from a record low of 5.1 in April. In the US, total nonfarm payroll employment rose by 4.8-million in June, exceeding expectations of 3-million additional jobs. US retail sales rose 17% month-on-month in May.

China’s NBS manufacturing PMI edged up to 50.9 in June from 50.6 in May. Notably, new export orders increased to 42.6 from 35.3, moving closer to the 2019 average but still in contractionary terrain. The private sector gauge for manufacturing activity – the Caixin manufacturing PMI – rose to 51.2 from 50.7. In Europe, the flash IHS Markit Eurozone Composite PMI increased to a four-month high of 47.5 points from 31.9.

Outlook & ETF Strategy 

Most central banks have vowed to maintain monetary support for as long as it is needed, which is positive for the outlook of risk assets and negative for fixed interest securities. However, the same cannot be said for fiscal support.

In some countries, particularly emerging markets, there is a risk that fiscal stimulus may become less generous due to fiscus pressures. Covid-19 support measures have stretched balance sheets of many weak economies like SA, which leaves very little room for further loosening of fiscal policy.

If anything, there is pressure for fiscal consolidation. But our top two worries at this point are the rising Covid-19 infections and a bleak global economic outlook. Emerging markets and some developed countries which reopened their economies this month are recording a sharp rise in Covid-19 cases. SA has seen the number of infections tripling and number of deaths more than doubling in June alone. There are signs that its health system is already overwhelmed, which is worrisome.

Several states in the US have also reported a sharp rise in new infections.  There is also evidence emerging of the airborne spread of the coronavirus. This was recently confirmed by the World Health Organisation after a group of scientists urged the global body to update its guidance on how the respiratory disease passes between people.

These dynamics could lead to further social distancing measures being imposed or voluntarily adopted, which will hold back economic activity. We have already seen this happening in some states in the US. For example, Texas, closed bars after a spike in cases. In SA there has been talk of reverting to hard lockdown in Gauteng, which recently overtook the Western Cape with the highest number of cases.

Leo-Moko-Cape-Town
Photo cred: Leo Moko/Unsplash

On another issue, the IMF recently warned that the pandemic will have an even bigger impact on the global economy than initially thought.

It forecast that the global economy will shrink by 4.9% this year – a downward revision of 1.9 percentage points from its April reading. We do not think investors are adequately pricing this in.

SA is in a much more precarious position because of its fragile economic state prior to Covid-19 and a lack of policy coherence within the ANC-led government. Infighting within cabinet has meant that the government has not been able to outline a detailed, credible set of recovery reforms and growth-boosting proposals. As a result, we see the country sinking deeper than peers.

Given this backdrop, we think an allocation that is overweight in offshore assets is still relevant for investors. Our ETF picks for that are: Satrix MSCI World ETF, Satrix MSCI Emerging ETF, the FirstRand US Dollar Custodian Certificate and the CoreShares S&P Global Dividend Aristocrats ETF. If you must invest in local equites, then the NewFunds Volatility Managed Defensive Equity and CoreShares South Africa Dividend Aristocrats ETFs are our picks.

 

Intellidex Reviews
June 2020: ETF Picks

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

If you thought this blog was interesting, you should also read:

Disclaimer

This research report was issued by Intellidex (Pty) Ltd. Intellidex aims to deliver impartial and objective assessments of securities, companies or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments. The information contained in this report is based on sources that Intellidex believes to be reliable, but Intellidex makes no representations or warranties regarding the completeness, accuracy or reliability of any information, facts, estimates, forecasts or opinions contained in this document. The information, opinions, estimates, assumptions, target prices and forecasts could change at any time without prior notice. Intellidex is under no obligation to inform any recipient of this document of any such changes. Intellidex, its directors, officers, staff, agents or associates shall have no liability for any loss or damage of any nature arising from the use of this document.

Remuneration

The opinions or recommendations contained in this report represent the true views of the analyst(s) responsible for preparing the report. The analyst’s remuneration is not affected by the opinions or recommendations contained in this report, although his/her remuneration may be affected by the overall quality of their research, feedback from clients and the financial performance of Intellidex (Pty) Ltd.

Intellidex staff may hold positions in financial instruments or derivatives thereof which are discussed in this document. Trades by staff are subject to Intellidex’s code of conduct which can be obtained by emailing mail@intellidex.coza.

Intellidex may also have, or be seeking to have, a consulting or other professional relationship with the companies mentioned in this report.