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Why SA ETF investors expected to favour a more global view this year

25 February 2021 Vicki Tagg, Head of Indexation at Ashburton Investments

After years of chasing the outperformance of United States (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 Coronavirus (COVID-19) outbreak, US indices like the S&P500 and the Nasdaq100 bounced back spectacularly in 2020 and continued to make record highs early this year.

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 rise in prices has led many analysts to question their lofty valuations.

So are the stocks and regions shunned last year due for a comeback this year as hopes rise for a normal world, thanks to vaccines?

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 Moet Hennessy Louis Vuitton and Japanese car giant Toyota.

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 R1 billion 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.

Currently the fund’s biggest sector weightings are technology (22%), healthcare (12.3%) 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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Covid-19 may accelerate certain industry trends. What are we likely to see?

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Adoption of contactless technologies and digital experiences will likely be accelerating emerging technologies further
The consumer will expect safety and precautionary measures, driving the need for enhanced surveillance policies and technologies, which may pose potential privacy concerns
Rising activism among consumers and employees could drive an increased focus on corporate purpose
Value chain disruption is likely to lead to an increase in creative partnerships, which may in turn cause organisations to further invest in developing the mindset and agility to collaborate across sectors in the ecosystem
Cost management will be a critical priority to ensure business continuity based on cash flow requirements, to manage lower margins and revenues during a downturn
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