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Market Uncertainty ETF Picks

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Intellidex ETF Picks

Uncertainty is here! But luckily the gurus at Intellidex are ready for the current market downturn and share 3 Exchange Traded Funds (ETFs) with us to combat market uncertainty, check it out!

Here are the Intellidex top picks for the long haul:

Domestic Equity

Satrix Capped All Share ETF (STXCAP)

After a strong showing in Q1 2022, the All-Share Index declined in April and was down 2.5% year-to-date. Index returns were dragged down by the mid-caps segment, resources, and industrials that all posted negative returns. In addition to the negative developments discussed above, we believe that profit from holdings in mining counters has already been made and that this may explain the pull-back in the mining sector.

Also, while banks should benefit from the South African Reserve Bank’s rate-hiking cycle, the 7.8% slide in the financial sector index (dominated by commercial banks) during April indicates that investors are more nervous about local economic prospects than the increase in activity following reduced lockdown restrictions (potential increase in transactional revenue) and increasing interest rates.

This informs our pick for broad exposure to SA equities, especially given the uncertain economic outlook for SA, which will ultimately affect SA company earnings. The Satrix Capped All Share ETF (-4.8% in April) exposes investors to SA equities but caps the maximum exposure of each share at 10%. It also has a reasonable total expense ratio (TER) of 0.25%. Another reason for the pick is the potential for a recovery in the Naspers/ Prosus pair of share prices.

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Foreign Equity:

Satrix MSCI World Feeder ETF (STXWDM)

Given that global equities have become relatively cheaper, Anchor favors exposure in high-growth sectors over the long term. Nasdaq similarly reports that the S&P500 forward price/ earnings ratio is 18.1x, which is slightly lower than the five-year average of 18.6x. Given the uncertain outlook globally, which includes lower economic growth and high inflation, we accordingly believe that broad exposure with a slight tilt toward growth companies may be useful.

Over the last 12-18 months, market views of a strong rotation from growth into value became quite prominent as there were high expectations of a stronger economic recovery, underpinned by a rebound in the services sector and a consumer recovery.

However, consumers globally face higher living costs from rising input costs that have been passed on by companies, which may place a drag on future consumer spending, especially of a discretionary nature.

Bonds and cash

Satrix SA Bond ETF (STXGOV)

We retain our bond pick from last month being the Satrix SA Bond ETF (-1.5%), which is the cheapest ETF in its class (TER: 0.25%). In addition to the diversification benefits of adding fixed income to a portfolio (discussed last month), we believe that SA’s nominal bonds may be relatively attractive.

According to SA’s derivative markets, where estimates of future interest rates are determined, the market is pricing in 180 basis points of hikes in 2022 and another 70 basis points in 2023. This would bring the repo rate to 6.75% by the end of next year.

However, Intellidex economists (and other investors) expect a more moderate interest rate path of 75 basis points for the rest of this year and another 75 basis points in 2023, bringing the repo rate to 5.75% by year-end (2023). If indeed a milder interest rate path is achieved due to SA’s subdued inflation relative to other economies globally, then demand SA bonds may increase due to attractive pricing and yields. Against this backdrop, Anchor forecasts a decent one-year total return on SA nominal government bonds of 10%.

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Informed decisions and Outlook

Our picks should provide an investor with a relatively diversified portfolio made up only of ETFs. However, asset allocation is not a one-size-fits-all concept. You need to make sure that the weights of different asset classes in your portfolio meet your unique risk-and-return objectives. Multi-asset ETFs, which are already diversified among asset classes, are analyzed as a separate category.

As a rule of thumb, we like ETFs that follow a watertight investment philosophy. They should also be tax-smart, which means they should qualify to be in a tax-free savings account. To avoid overconcentration, a good ETF should cap its exposure to a single sector and/or a single counter. While competition among providers is intensifying and ETF costs are coming down, we look at this metric closely and prefer ETFs with low total expense ratios (TERs). An overview of our favorite funds for each category follows.

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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.