Global markets, investment styles and your ETF portfolio

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Global markets,

investment styles

and your ETF

portfolio

Gershwyn Benjamin

Equity Research

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Topics covered

• Quarter one summary

• Investment styles

• Value vs growth trend

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• Strong performance in equity and commodity markets

• Vaccination gained momentum – albeit at a different pace worldwide

• US $1.9trn rescue plan passed with plans for a $3trn economic package

• “Reflation” trade due to concerns about the pace of growth and inflation

• Suggestion of a rotation out of “growth” and into “value” shares (discussed

later)

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What happened? Global equities

Source: IRESS 0.1% 3.1% -1.7% 4.2% 0.4% 4.9% 6.9% -2.9% -2.3% 11.3% 4.5% 1.9% 5.8% 2.8% 5.4% 8.3% -0.3% 3.9% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

All Share MSCI World MSCI

EM&Front. S&P500 Nasdaq FTSE100 CDAX Nikkei 225 Hang Seng March YTD

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What happened? South African equities

0.5% 2.9% 7.1% -1.2% 1.5% _0.6% 5.6% 10.5% 11.9% 8.7% 19.8% 15.8% 12.2% 1.7% 25.6% -2.7% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

All share Mid caps Small caps Resources Industrials Financials P. group metals Gold mining March YTD

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• Equity investing based on company traits that are academically proven to

affect share prices

• Value – Investing in “unloved”, cheaply priced shares based on fundamental analysis (low P/E and P/B ratios)

• Growth – Companies that display above market/sector or economic growth characteristics

• Quality – Firms with good business models and strong fundamentals (high profitability, good capital structures and strong cash flow)

• Momentum – Buy shares that display a continuation in upward trends (“winners”) and sell in downward trends (“losers”)

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How has the style rotation played out?

• Global equity investors have favoured “growth” due to cheap liquidity

conditions

• Growth shares rallied further during the pandemic (big technology component)

• Value has made a comeback since initial lockdowns ended

• Recovery expected in traditional sectors of the economy (banks, retailers,

hospitality-type companies)

Source: MSCI indices

3% 5% 55% 13% 14% 11% 6% 10% 49% 8% 10% 8% 1% _0% 59% 19% _18% 13% 0% 10% 20% 30% 40% 50% 60% 70%

1 month 3 months 1 year 3 years 5 years 10 years

Index returns to end-March 2021

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What the research into styles concludes

Index of indices

• Styles outperform the overall market over the long term

• However, different market conditions (cycles) can mean long periods of underperformance

• Index of indices – combining styles -can reduce cyclicality as some styles can offset poor performance of others

Multi-style approach

• Major problem with index of indices:

Dilution of style exposure

• Diluted style exposure can negatively affect performance

• This can be mitigated by a multi-style approach that maximises exposure (“sweet spot”)

• Reduces both cyclicality and diluted style exposure

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• Advantages

• Reduces cyclicality and boosts style exposure that can enhance returns

• Accessible at a low cost in multi-style ETFs

• Disadvantages

• Correlation is key, styles can still underperform when correlations deviate from normal levels

• Low penetration of multi-style ETFs in SA market

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Revised economic outlook for 2021

Source: International Monetary Fund -3.3% 6.0% 4.4% -4.7% 5.1% 3.6% -3.5% 6.4% 3.5% 2.3% 8.4% 5.6% -7.0% 3.1% 2.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 2020E 2021F 2022F

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Equity market conditions

Global equities

• US equity market currently expensive

• However, US economy needs to recover lost output hence a neutral allocation to US equity

• Non-US equity allocation beneficial as these markets are cheaper; cyclical in nature

• Emerging markets an opportunity as cyclical industries recover

Local equities

• Consumer-led recovery and exports boosted retail and mining sectors

• High savings may boost demand in the services sector (leisure; tourism)

• However, vaccine rollout slow – could lead to volatility

• Structural issues stalling the

momentum in recovery from the pandemic

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ETFs to consider for your portfolio

Global

• 1nvest MSCI World Index Feeder

• Satrix MSCI Emerging Markets ESG

• Sygnia Itrix Euro Stoxx 50

• Sygnia Itrix FTSE 100 ETF

Local

• CoreShares Scientific Beta Multi Factor (TIC - 0.75%)

• Satrix Momentum (TIC - 0.83%) • NewFunds Value (TIC - 0.50%) • Satrix Quality (TIC - 0.89%)

• NewFunds Low Volatility (TIC - 0.50%)

Core & Tactical

• Satrix Top 40

• 1nvest SA Bond ETF • Satrix Fini

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