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Global Equities Shariah Monthly Report | February

 

  • Our Shariah ETF will invest in companies of a high quality with wide economic moats
  • The fund will take active positions against the index with typically 30 positions against the index’s 400 constituents 
  • Historically, Sanlam Investments has managed to outperform indices through a rigorous valuation process that selects high quality businesses

 

Performance Review

In January the our Shariah ETF's net asset value decreased by 1.1% in Dollar terms as news of new strains of the virus weighed on market returns.  We saw strong performances in a number of our stocks however, including Abbott Laboratories, Alibaba, and Johnson & Johnson.

The start of the year saw a swing from investors back in to structural growth away from cyclical growth, with those companies which previously saw strong returns due to being beneficiaries of the vaccine news losing some of their steam.  That said, returns from the energy sector continue to be strong, and prove to be a headwind to those that do not have exposure.

Source of all data: Sanlam Investments. Past performance is no guarantee of future performance.

 

What Has Driven This Performance?

The best performing stock this month was Abbott Laboratories (+13.3%).  Abbott manufactures and markets medical devices, blood glucose monitoring kits, nutritional healthcare products, diagnostic products and equipment, and branded generic drugs. We believe innovation is thriving in the med-tech industry, which supports sustainable long-term organic revenue growth in the mid-single digits. There are long-term structural tailwinds driving innovation such as rising prevalence of chronic diseases, global ageing populations to emerging health care systems maturing. Importantly, Abbott mostly operates in markets dominated by only a few competitors who participate in rational oligopolies. Abbott has an attractive range of new innovations and drivers (in structured heart, diagnostics and diabetes) coming to the market that should support sustainable organic growth. 

Abbott reported strong results during the month, with management’s guidance and tone positive for this year and beyond. Management is confident Abbott can deliver double-digit earnings per share growth again in 2022.  During the fourth quarter, Abbott grew around 28% organically to reach $10.7 billion in sales beating expectations. Operating income grew 53%, also ahead of consensus. Their Diagnostics part of the business grew a massive 40% during 2020 driven by more than 100% growth in its molecular and rapid diagnostics businesses on the back of COVID testing demand. Abbott delivered over 400 million COVID tests in 2020, including more than 300 million in Q4 alone. The company’s manufacturing capacity could potential support $12-$14 billion in sales. [1]  Management plans to reinvest much of the extra cash being generated by the COVID testing business into research and development, supplemented by more targeted investments in a handful of businesses (e.g., Diabetes, Nutrition). We believe this sets Abbott up for solid growth over the medium-term. 

Alibaba (+9.1%) also performed well during the month, rising on the back of the re-appearance of their founder, Jack Ma. He had not been seen in public since criticising the Communist Party in October.

Taylor Wimpey (-11.3%) and Edwards Lifesciences (-9.5%) struggled during the month.  As new strains of the virus emerged and lockdowns were imposed around the world, it was no surprise to see these names come under pressure.  The pandemic clearly had more of an impact on the Edwards’ operations than was expected but confidence in the future remains very high. With the surge in the spread of covid-19, there has been more pandemic-based hospitalisations. This has meant less scope for other procedures and Edwards has not been immune from this. 

Source of all data: Sanlam Investments. Past performance is no guarantee of future performance.

 

Portfolio Activity

Our Shariah ETF initiated a position in Boston Scientific during January. Boston Scientific Corporation develops, manufactures, and markets minimally invasive medical devices. The Company's products are used in cardiology, electrophysiology, gastroenterology, neuro-endovascular therapy, pulmonary medicine, radiology, urology, and vascular surgery. Boston Scientific has a maturing pipeline in its core markets.  However, its product pipeline is augmented by merger and acquisition activities to drive a sustainable high single-digits compound organic growth profile.  Furthermore, the company is targeting incremental 50-100 bps of annual operating margin expansion which can drive both free cash flow and earnings growth which could support a premium valuation to its peers.

At current levels, Boston Scientific is trading at a discount to peers even though organic revenue growth over the next few years will be above that of the peer group.  Balance sheet flexibility will also improve as the company steadily pays down debt this calendar year.  In its latest results announcement, the company guided 12-18% organic revenue growth for 2021.[2]  This is an impressive recovery from a low base. Should the company continue to execute its business plan, we believe there is upside to our intrinsic value over time. 

We used weakness in the likes of Taylor Wimpey, L’oreal and Inditex to top up our positions.  Emergence of new strains of the Covid-19 virus also affected these two names, with Inditex (the owner of the Zara brand) relying on the reopening of shops, and a portion L’oreal’s revenue linked not only to retail, but more specifically travel retail.  We believe that both these high-quality companies will thrive once lockdowns are finally over. 

 

Outlook

As the global pandemic continues to exert its stranglehold on the global economy, it seems absurd that equity and fixed-income markets are still finding new highs. We’re unlikely to be wealthier given the devastating economic impact of covid-19, so what is really going on, and how will it impact investors? Thanks to emergency monetary stimulus, there are 30% more US dollars in the world than a year ago, and a large proportion of those dollars have helped to bid up the price of US equities and bonds. So rising equity prices are not really a sign of a burgeoning economy. Rather, they are a product of freshly printed money seeking a home that offers the best possible return. The fact that interest rates are so low is also helping. Companies can borrow at will, which helps to drive growth and future returns as well as prevent bad companies from going under. At the same time, the US Federal Reserve has said it will allow inflation to run above its 2% target before increasing interest rates, and inflation is unlikely to rise significantly in the immediate future since people are buying fewer and cheaper goods and services thanks to the pandemic. As investors, we surely can’t complain about such positive conditions. But as equity prices ride high and bond yields remain close to zero, investors are forced to take more risk in search of return. We must also ask whether businesses are able to live up to current valuations in terms of future growth and earnings, and what risk that brings to portfolios.

The good news is that there are still pockets of opportunity. Much of last year’s equity growth was driven by the US as investors flocked to the relative safety of the American economy. Within that, technology stocks soared since they were net benefactors of the covid-19 crisis. As a result, the UK, Europe, and Japan struggled to rebound to pre-covid levels. And while emerging markets fared better, that’s largely because their valuations were low in the first place. For that reason, we will exercise caution and consideration when investing in US-based companies while looking for opportunities in other regions. A strengthening global economy will give good companies around the world the opportunity to outperform their current valuations. That said, we expect longer-term economic growth, and therefore returns, to be muted. Government policy is likely to divert resources to servicing debt and funding political programmes such as the green agenda, rather than helping businesses prosper. And while economic conditions will improve, there are significant wounds to heal, which won’t happen overnight. Although current equity valuations could be sustainable in the absence of other opportunities, we will remain cautious in our stock picking to avoid taking unnecessary risk.

 

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