Intellidex ETF Picks
Tax-Free Savings is all the rage in the month of love, and we are in love with the latest Intellidex ETF picks that are sure to add value and growth to your TFSA or even your retirement portfolio.
Here are the Intellidex top Equity picks for February:
Domestic Equity
Satrix Capped All Share ETF (STXCAP)
We start our thesis for the local core ETF pick with economic developments in China. The MSCI China index slumped 23% in 2021 (in USD), due to economic and regulatory events that spooked investors. For example, Chinese authorities announced a reduction in gaming time for minors and those online tutoring companies could no longer profit from compulsory courses.
Overall, this represents an alignment with China’s goal of common prosperity which means more competitiveness and investment in strategic areas. This implies a reallocation of human, educational, capital, and other resources to achieve government objectives.
Investors in SA are particularly concerned about the Naspers/Prosus pair. Prosus has a 29% stake in Chinese internet giant Tencent, which was ordered to cancel exclusive music licensing deals in 2021 and lost value due to soured overall sentiment towards China.
This has caused a renewed focus by Naspers/Prosus on the ex-Chinese assets of the group to avoid more scrutiny. However, Tencent, which has exposure to gaming, social networks, and other businesses means that it is diversified, which may reduce its risk of further regulatory scrutiny. This combined with the fact that Chinese equities are cheap (forward price: earnings of 12 for 2022) implies that they may provide good returns to the patient investor. In SA, the FTSE/JSE All Share index’s return of 24% in 2021 was underpinned by a broad-based increase in most sectors, except technology which consists of the Naspers/Prosus pair.
Given this and the fact that SA has a typical value bias from a global perspective, we believe that SA may be positioned for at least a decent if not similar return in 2021 – underpinned by the Naspers/Prosus pair. However, we would recommend capped exposure, as such, our core pick for exposure to SA equities is the Satrix Capped All Share ETF (+1.4%). It caps exposure to each share at 10% which reduces concentration while providing broad exposure to SA equities. It has a total investment cost of 0.25%.
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Foreign Equity:
Sygnia Itrix FTSE 100 ETF (SYGUK)
We believe the Sygnia Itrix FTSE 100 ETF (-3.2%) is useful for investors that may want to add some value shares to their portfolio while gaining exposure to global equities. The fund has a healthy 69% exposure to value sectors, which make up most of the companies listed in the UK’s FTSE 100 index. This will be costly though, as the ETF has a TIC of 0.88% if investing through a platform other than the Sygnia Alchemy platform, where the TIC drops to a bearable but still high 0.65%.
As a result, we’d recommend the ETF as part of an overall equity portfolio with more ETFs that provide global equity exposure.
In this regard, our pick is the CoreShares Total World Stock Feeder ETF (GLOBAL) (-8.8%).
While global equities came under pressure this past month, especially in the growth-heavy US, we believe that maintaining exposure is warranted, especially for local investors.
With approximately 8,000 holdings in its basket, this ETF improves diversification with its reduced exposure to tech heavyweights such as Apple, Microsoft, and Amazon.com. It has a reasonable TIC of 0.29%.
Risks to the global outlook include the continuing stickiness of inflation, new variants of Covid-19, and even more aggressive monetary tightening by the Fed and other central banks. However, if contractionary monetary policy is gradual, rather than aggressive - owing to moderating inflation - (especially if supply chain issues subside) then the outlook may improve.
Specifically, the International Monetary Fund revised its global real GDP growth forecasts downward for 2022. It expects global growth of 4.4% in 2022 and 3.8% in 2023. However, an improved outlook – that combines moderate monetary policy tightening, subsiding supply chain bottlenecks, increased vaccination, and a consumer recovery - may lead to higher-than-expected growth, through stronger earnings which would be supportive of global equities.
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Informed decisions and Outlook
Throughout 2022, Intellidex expects the following factors to be the main drivers of global economic activity and investment returns:
- Developed market central banks reducing asset purchases and increasing interest rates
- Rotation out of “growth” into “value”; however, earnings are expected to be the main driver of global equity returns
- Economic recovery in China following its regulatory realignment
In addition, they expect moderate to high commodity prices and high-interest rates (beneficial to financials) to underpin moderate earnings growth for companies in SA. However, SA’s weak economic backdrop remains a significant risk to earnings and investment returns.
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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
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.