The ETF Monthly Review: December 2018

Welcome to this month’s ETF Review, a neat update of market news affecting ETFs, as well as a set of favourite funds chosen by the Intellidex team. We collaborate with Intellidex to bring you the latest insights on ETFs – probably the niftiest way to invest!

IN THIS ISSUE:

What’s happened in the markets?

• Unstable US-China relations rattling global markets
• Brexit deal remains uncertain
• Oil price weakens due to a supply glut
• SA escapes recession in Q3

Our favourite ETFs

• Domestic equities: CoreShares Equally Weighted Top 40 ETF
• Foreign equities: Satrix MSCI World ETF and Satrix MSCI Emerging Markets
• Bonds and cash: NewFunds TRACI 3 Month (short term); Satrix ILBI ETF, Stanlib Global Bond ETF and Ashburton World Government Bond ETF (long term)
• Dividend/income funds: Stanlib SA Property ETF

What’s happened in the markets?

Global markets continue to be rattled by geopolitics and volatility has increased. Volatility on the JSE as measured by the Savi index was in the 20s for October and November, the first time it has been above 20 in almost two years. An equally weighted portfolio of non-commodity JSE-listed ETFs lost 1.74% in November. Funds that track local assets declined 0.69% on average while those that track global markets ended 3.36% down. Similarly, Intellidex’s selection of ETFs, on an equally weighted basis, lost 2.04%.

Local markets

Absa’s NewFunds NewSA fund, which gives investors the opportunity to invest in companies with superior BEE credentials, was the top performer in November, climbing 5.21%. Similarly, top 40 Swix-weighted funds – which are relatively overweight in Naspers – performed well, averaging 3.27% as Naspers recovered from its October blues.

Contrarily, resources were hammered as the price of oil plummeted while the rand gained significant ground against the greenback. The NewFunds S&P GIVI SA Resource 15 fund was the worst performer, losing 8.68%.

Since the beginning of the year the performance of the JSE has been strongly correlated to the rand-dollar exchange rate, with the bourse showing strength when the rand exhibits some weakness.

This is because global events on the JSE are reflected through the rand-dollar exchange rate.

Economically, we are beginning to see some green shots which should filter through to improved equity performance, if sustained. The big one was the economy growing by 2.2% in Q3 due to a broad-based recovery in manufacturing, agriculture and retail sales. Recent reports show that the momentum has continued into the fourth quarter with manufacturing output jumping by 3% (well ahead of the consensus forecast of 1%) in October compared with growth of 0.1% in September. This means factories are now producing more than at any time since June 2016. Mining also surprised, edging up by 0.5% in October, beating consensus forecasts of a decline. Furthermore, the Absa PMI rose to 49.5 index points in November from 42.4 in October. This was the first increase after three straight months of declines and brought the index to its best level since July 2018. This corroborates findings from the RMB/BER Business Consumer Index suggesting that economic growth might improve marginally in Q4.

Although Intellidex expects economic growth to improve next year to 1.7% from the 0.7% expected this year, we are cognisant of structural bottlenecks that need to be addressed before the economy can

grow to levels around 5%.  Bar the reforms needed to fix the economy, we believe the economy will be stuck in a low-growth trap of around 2% in the medium term.

Furthermore, unemployment remains stubbornly high with the economy shedding 16,000 jobs in the third quarter. And the consumer inflation rate inched up by 0.1 percentage points to 5.2% in November, somewhat vindicating the rate hike of 25 percentage points by the South African Reserve Bank.

International markets:

For funds containing international assets, the best performer, Sygnia’s Itrix Global Property fund, rose 1.12%. at the other end of the continuum, the Sygnia/Itrix FTSE 100 ETF suffered a 5.32% loss on the back of the Brexit crisis. All other internationally focused funds, bar the Satrix MSCI Emerging Markets ETF, were in the red.

Global equities are dominated by US stocks which have outperformed other markets by quite a stretch. The US-Sino relations remain uncertain with a trade truce until March hanging in the balance. Making matters worse was the arrest in Canada of Huawei CFO Meng Wanzhou for allegedly violating US sanctions on Iran. These geopolitical developments have set global markets on a roller-coaster. However, early indications on the negotiations between US and China seem positive.

Meanwhile, mixed global economic data have failed to inspire a sustained recovery in the markets. The IMF has revised global growth downwards to 3.7% from 3.9%. A development with widespread consequences is the fast decline in the world oil price, which tumbled more than 23% in November due to a supply glut, to less than $60/barrel for the first time in more than a year.

In the US, the Federal Reserve chair hinted at a more cautionary stance towards further rate. hikes as the policy interest rate is just below a

level that would be neutral for the economy. Although this supported an equities recovery for a while it was overshadowed by escalating geopolitical tensions. News from the US Federal Reserve, combined with slower job growth, point to the likelihood of fewer interest rate hikes in 2019 than previously expected. Overall, the US economy remains on a firmer footing despite the marginal softening of its IHS Markit composite PMI output index to 54.4 in November, down from 54.9 in October.

The eurozone continues to weaken with the IHS Markit composite PMI falling to an almost four-year low of 52.4, from 53.1 in October. This is reflected in the Sygnia/Itrix EuroStoxx50 fund, which fell 4.79%.

Across to the east, we see China continuing to slow down. The Chinese official composite PMI fell to 52.8 points from 53.1 in November. Its first subcomponent, the official manufacturing PMI, edged down by 0.2 points to 50 index points, which is considered to be a neutral level. The official non-manufacturing PMI performed better, but still declined for a second straight month to 53.4 in November. The November survey reflected further weakness in both domestic and export demand. However, the Caixin Services PMI showed that China’s services sector grew at its quickest pace in five months in November. The index tracking new orders rose to 53.8 from 50.8 in October, well above the neutral 50-point mark. The Caixin Manufacturing PMI edged up in to 51.9 in November from 50.5 in October.