INVESTING
28 February 2021
JUNAID BRAY Co-Portfolio Manager and Research Coordinator, Laurium Capital
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Looking ahead into 2021
he year 2020 will certainly go down in history term structural effects on economies, industries books as one of the most turbulent in modern and companies? history. We entered the year with a reasonable degree of optimism. As the global impact of the The last question is particularly pertinent to our COVID-19 pandemic dawned upon markets, we local economy. The pandemic has widened the gap witnessed one of the most severe drawdowns during between countries with more resources to reboot the first quarter of the year. With governments their economies, compared to those with less. The around the world unleashing unprecedented levels of more developed economies have more resources monetary and fiscal stimulus to (and substantially lower costs support their COVID-19 bruised debt) to support their ANECDOTAL FEEDBACK of economies, we subsequently economies and also have earlier FROM SEVERAL SOUTH access to vaccines, so they may experienced one of the most aggressive recovery rallies recover sooner than their less AFRICAN CORPORATE on record. developed counterparts. MANAGEMENT TEAMS We enter 2021 with the The economic impact of IS THAT THE RECOVERY COVID-19 will be felt for years tailwinds of monetary and fiscal support, coupled with the rollout to come. Economic growth HAS GENERALLY BEEN of vaccines, as well as the low in SA is generally expected to FASTER THAN THEY HAD decline by around 8% during base set by the near economic standstill induced by the initial 2020, followed by a muted ANTICIPATED COVID-19 extreme lockdown recovery of less than 4% in measures during the first half of calendar 2020. 2021. It is expected to take several years to recover We are cognisant that the recovery is not without to 2019 levels. The weak economic environment and risks and constantly ask ourselves questions such as: resultant tax revenue shortfall has exacerbated our • How sustainable is the recovery and what is budget deficit, highlighting the unsustainability of priced in? our debt trajectory, unless drastic steps are taken to • What are the risks that could derail the recovery? avert a debt crisis. • How effective will the vaccines be? Will there be However, markets tend to be forward-looking and, severe side-effects, and will they work against we think, have largely priced in this sombre backdrop. mutations of the virus? In some domestically focused sectors, such as banks • Most importantly, what are the medium-to-longer and insurers, we feel that this negative backdrop
VICKI TAGG Head: Indexation, Ashburton Investments
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fter years of chasing the outperformance of US stocks, we expect South African investors to exercise caution this year by taking a more global stance as worries rise about rich valuations of long-favoured American names. Despite steep falls in March in response to the COVID-19 outbreak, US indices like the S&P500 and the Nasdaq100 bounced back spectacularly in 2020 and, at the time of writing this article, they had continued to make record highs. This was driven mostly by ‘Big Tech’ names like Apple, which rose 85% in 2020, while Amazon, Netflix and Tesla rose 78%, 60% and 740% respectively. While investors bid up prices of tech-related stocks last year, they ignored ‘old economy’ stock – like traditional financial services companies, travel and energy stocks. But things have changed. And while the US stock market contains many of the world’s best companies, which remain excellent long-term investments, the dramatic
has been overly priced in and some stocks offer an attractive risk-reward trade-off. Anecdotal feedback from several South African corporate management teams is that the recovery has generally been faster than they had anticipated, especially relative to the extremely cautious environment they had planned for. Additional factors that could see the local SA market outperforming from current levels: • The ALSI was only up 7% for the year and has lagged global markets, with the MSCI World up 16.5%. Emerging markets have broadly lagged and may benefit from rotational inflows (out of developed markets and into emerging markets) – some of which may flow into SA.We believe that more ‘value’ real economy companies should outperform, were some of this to unwind. Many of the domestic sectors, such as banks and insurers, would benefit from continued value outperformance. • In the US, the ‘Blue Wave’ with the democrats having won the Georgia run off, will likely see the democrat majority usher in a larger US stimulus, which in turn may lead to USD weakness, which is broadly supportive for emerging markets and real economy companies. We believe our funds are well positioned and diversified, and offer attractive upside, while pragmatically weighing up the inherent risks in order to achieve the best risk-adjusted returns for our clients going forward.
SA ETF investors expected to favour a more global view this year
rise in prices has led many analysts to question their lofty valuations. So, as hopes rise for a normal world towards the end of 2021 – thanks to vaccines – are the stocks and regions shunned last year due for a comeback? Because of this uncertainty, in 2021 we expect South African investors to hedge their bets by also looking to markets that perhaps offer better value. These areas include Europe and Japan in particular, both of which are attracting strong flows to their best companies, like French multinational luxury goods company LVMH Moët Hennessy Louis Vuitton, and Japanese car giant Toyota.
SO ARE THE STOCKS AND REGIONS SHUNNED LAST YEAR DUE FOR A COMEBACK THIS YEAR? Already this year we have seen rising flows into the Ashburton Global 1200 Equity Fund of Funds ETF (ASHEQF),
pushing its assets under management over R1bn for the first time. It captures 70% of the world’s market capitalisation by investing in seven geographically diverse Exchange Traded Funds (ETFs) to keep costs low while ensuring tracking efficiency. These are the S&P500 (US), MSCI Europe, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50 and S&P Latin America 40. The ETF has delivered just shy of 50% in total returns (price appreciation plus dividends) in the past two years, far outstripping the returns in the Johannesburg Stock Exchange (JSE) Top40 and JSE All Share Indices. It provides hard currency diversification in one simple JSE-listed investment that doesn’t require the use of offshore allowances. We reduced its management fee last year from 0.37% to 0.25%, which has also added to the appeal of the fund. It is a regionally well-balanced ETF, suited to current market conditions by keeping exposure to winning US
shares while being broad enough to capture any strong gains elsewhere in the world. Country weightings US
62.49%
Europe
19.36%
Japan
7.39%
Canada
3.13%
Australia
2.09%
Asia
4.80%
Latin AM
0.74%
At the time of writing this, the fund’s biggest sector weightings are technology (22%), healthcare (12.3%), consumer discretionary (12.4%) and financials (13.3%). The biggest individual stock holding is Apple at 4%. All stocks mentioned in this article are held within the Ashburton Global 1200 Equity Fund of Funds ETF.
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