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Global Equities Shariah Monthly Report | April

  • The Shariah ETF will invest in companies of a high quality with wide economic moats ·      
  • The Shariah ETF 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 March the Shariah ETF's net asset value increased by 3.6% in Dollar terms, outperforming the global equity market by 0.5%.

Consumer staples were the best performing sector globally and contributed 40% of the strategy’s overall return with an exposure of 23% of the strategy’s net assets.  Henkel, Mondelez and Procter and Gamble (a new position in February) had double digit gains during March.

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 Henkel (+13.8%).  Taylor Wimpey (+13.0%) continued its strong performance, and Assa Abloy (+10.8%) also performed well. 

Henkel

The Adhesives division is 50% of Henkel’s operating profit and will see organic growth rebound sharply in the first half of this year, namely by +5% in the first quarter and an estimated +22% in the second quarter. The Adhesives division is an ultra-cyclical division for Henkel and will benefit as industrial activity rebounds globally. Economists expect a V-shaped recovery of industrial production with global industrial production expected to grow +5.5% in 2021 from a contraction of 5% in 2020.  This will put global industrial production back to 2019 levels.  We used earlier weakness in the share price of Henkel to increase our position size in anticipation of a strong recovery in the adhesives division.

Henkel will also benefit from a strong recovery in its Beauty Care sales. The forced closure of salons pulled Beauty Care organic growth down to -2.8% last year. As salons reopen, we expect a similar sharp rebound in organic growth of 4% in quarter one and 16% in quarter 2.  Whilst the household goods division has some ongoing lingering concerns we expect management to beat low embedded expectations as the company invest more in historically underinvested brands and try to turn around a culture of share losses in the US in particular.

Taylor Wimpey continued to benefit from macro tailwind described in detail in our February commentary.

Assa Abloy

Assa has performed well since we initiated a position at the launch of the fund in September 2020. We remain optimistic on Assa Abloy’s earnings near term due to the group’s business model which has proved itself relatively resilient throughout macro-economic downturns. However the stock is increasingly discounting a continuous benign economic environment which may not be forthcoming.  We are concerned that near term, investors could be negatively surprised by the extent of the revenue and earnings decline as the lock/door industry is not spared from the current demand holiday. However, in the absence of structural factors affecting Assa Abloy’s end markets, we see a relatively fast earnings recovery, with margins being supported by savings and a positive net pricing. We will be patiently waiting on the side-line for an opportunity to invest in this high quality business.

Alibaba (-4.6%) and Qorvo (-2.2%) lagged during the month. The Chinese regulator continues to talk tough on regulating their large technology names and this is having a dampening effect on market sentiment. Lending seems to be of particular interest to the regulator and this would expose Alibaba.

Qorvo was exited during the month as the stock has fallen out of Shariah compliance.

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

 

Portfolio Activity

During March we exited our position in Assa Abloy (described above) and initiated a position in Skyworks. 

Skyworks Solutions manufacture highly innovative analog semiconductors connecting people, places, and things; and the forefront of developing empowering wireless networks, such as 5G and Internet of Things (IoT). Its flagship handset products handle amplification, filtering, tuning, power management, and audio processing in phones used by Apple Inc., Samsung Electronics, Huawei, HTC, ZTE, and many more. Other products include attenuators, diodes, couplers, phase shifters, receivers, and switches used in a broad array of industries. The company serve customers in the aerospace, automotive, broadband, cellular infrastructure, connected home, entertainment and gaming, industrial, medical, military, smartphone, tablet, and wearable markets. About 60% of the company's sales comes from US customers.

We believe Skyworks continues to represent a compelling opportunity with a clear path toward double-digit sales and earnings per share growth over the next 3 years at least. 5G remains one of the most powerful investment themes in the semiconductor industry and still has a long way to go in terms of growth opportunities and market share shifts. Furthermore, we see a growing opportunity in consumer electronics, IoT and automotive with a broad, margin-rich WiFi 6 offering providing compelling long-term value enhancement.

 

Outlook

The global economic outlook is strengthening, and this view has been reinforced by many companies reporting expectation beating earnings for the last quarter of 2020. But while good business results go some way towards explaining the confidence in equity markets, are they enough to justify inflated prices?  As always, it’s important to dig beneath the rhetoric to understand what is really going on and where investment opportunities lie.

Since the pandemic struck, the gulf between growth stocks- whose perceived ability to outperform the market over time is due to their future potential, and value stocks, which appear undervalued given their earnings forecasts and which tend to be more dependent on a strong economy, has widened considerably. This has been driven by expanding valuations in growth stocks, rather than increased earnings expectations, which suggests investors are getting carried away by the promise of a post-Covid boom buoyed by central bank support.

We believe there will be continued volatility in markets as the world emerges from the pandemic. Last month, government bond yields on both UK gilts and US treasuries began to climb rapidly, which spooked equity markets – a case in point.  When globally, real yields remain negative, a minor increase in real interest rates could have a detrimental impact on the relative multiples of growth shares for example, whereby a higher discount rate will reduce the value of profits over the next ten years.  Current conditions make our approach to careful stock-picking even more critical, and with lessons from history such as the ‘dot-com bubble’ and the global financial crisis showing us that changes can unfold dramatically, we continue to avoid areas of the market that look most overvalued. 

Energy stocks continued their strong performance in 2021, after bottoming out toward the end of October last year.  Year to date, the drag on the portfolio amounts to 2.3%.  We continue to avoid this sector due to a combination of low return on equity, highly unpredictable earnings as well as high capital intensity. Instead, we have deployed capital to names like Procter and Gamble, and Skyworks this year.  Procter and Gamble generates a normalised return on equity of over 32%, operating margins of 22% and a robust free cash flow stream.

Strong stock selection in health care and information technology has helped the negative impact of not owning any energy names.

 

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