The Schwab US Dividend Equity ETF (SCHD) stock price rose for five consecutive days and was trading at $84.15, a few points below its all-time high of $84.56. It has jumped by 12% this year while its total return stood at over 18%. 

The Liberty All-Star Equity (USA) fund is doing even better as its stock has jumped by 9.87% while its total return was 18.90%. It has even beaten the closely watched Invesco QQQ (QQQ) and the SPDR S&P 500 (SPY) exchange traded funds, whose total return stood at 15% and 16%.

Federal Reserve boost

American stocks have done well this year, helped by the rising expectations that the Federal Reserve will start to cut interest rates in its first meeting.

The Fed will start its two-day monetary policy meeting on Tuesday and then deliver its interest rate decision on Wednesday.

Economists agree that the bank will start slashing rates in this meeting. Most of them expect either a 0.25% or a 0.50% cut while Senator Elizabeth Warren is pushing for a giant 0.75% cut. 

The Fed typically cuts rates by such a big number when there is an economic emergency. In today’s case, however, the economy is doing well, with inflation falling and the labor market being tight.

Interest rate cuts will likely pull investors back to American stocks. Besides, many of these investors have stashed over $6.1 trillion of assets in high-yielding money market funds. 

The other catalyst for the SCHD ETF and the USA Fund is that corporate earnings have been relatively strong. A report by FactSet shows that companies had earnings growth of over 10% in the second quarter.

Its estimated earnings growth for the third quarter for companies in the S&P 500 index will be 4.9%. If this estimate is correct, it will mark the fifth consecutive quarter of earnings growth. 

Historically, stocks tend to do well when the Fed is cutting interest rates. For example, equities erased gains made in March 2020 and then surged to a record high during the pandemic.

SCHD is a great fund for dividend investors

The SCHD has emerged as one of the best ETFs for investors focused on dividends. Its performance has been notable because it has not been driven by technology companies. Instead, it is mostly made up of companies in traditional industries like financials, healthcare, consumer staples, and industrials. Tech companies make up less than 10% of the fund. 

Some of the biggest companies in the fund are Lockheed Martin, AbbVie, Home Depot, Blackrock, and Coca-Cola. It also has significant stakes in firms like Amgen, Verizon, and Bristol Myers Squibb. 

The fund has done well over the years. Its worst year ever was in 2018 when it had a negative return of 5.56%. It then dropped by 3.23% in 2022 and 0.31% in 2015. In these three years, the S&P 500 dropped by 4.56%, 18%, and 0.2%, respectively.

Its total return in the last five years was 81.20%, underperforming the S&P 500 and Nasdaq 100 indices that rose by 102% and 155%. SCHD has a dividend yield of 3.40% and a 10-year compounded annual growth rate of 11%, higher than the sector median of 6.28%.

Liberty All-Star Equity Fund | USA

The Liberty All-Star Equity Fund (USA) is another great alternative for SCHD ETF fund. It has a dividend yield of 10.42%, meaning that a $100,000 invested in the fund will bring a gross return of over $10,000. 

There are two primary differences between the SCHD and USA funds. First, SCHD is an exchange-traded fund that tracks companies in the Dow Jones 100 index. Liberty All-Star Equity Fund is a closed-end fund (CEF) that tracks companies and applies some leverage.

Second, there is a difference in their composition. The biggest component of the USA fund is the financials, which accounts for 21.22% of assets followed by information technology, healthcare, consumer discretionary, and industrials, which account for 21.18%, 13.07%, 12.20%, and 7.9%, respectively. 

The biggest companies in the fund are Microsoft, Alphabet, Amazon, UnitedHealth, NVIDIA, Visa, Servicenow, and S&P Global. Its top 20 companies account for about 33% of the fund, making it more diversified. 

An additional difference is that the USA Fund is actively managed, meaning that the manager buys and exits positions regularly. Some of the most recent purchases were Baxter, Novo Nordisk, O’reilley Automotive, and Skyworks Solutions.

The USA Fund has done well over time, with its total return being 80% compared to S&P 500’s 102.8%. Most notably, the fund constantly trades at a discount to its net asset value (NAV), meaning that the spread may narrow when the Fed starts to cut rates.

The main con for investing at the USA Fund is that it is relatively expensive, with an expense ratio of 1.01%, which is massive. In contrast, the SCHD fund costs just 0.06%.

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The Invesco S&P 500 Equal Weight ETF (RSP) surged to a record high on Monday as investors focused on the upcoming Federal Reserve interest rate decision. The fund jumped to a high of $176.55, continuing an uptrend that started on September 11. 

RSP is seen as a better S&P 500 alternative

The S&P 500 index is one of the most popular funds in Wall Street since it tracks the biggest companies in the United States. 

It was established in 1957 when it was trading at $386, which, adjusted to inflation is worth about $4,071 today. 

The fund is made up of 500 companies, which it ranks in terms of market cap. As a result, it is often highly concentrated in the tech industry. Tech stocks account for 32% of the fund followed by financial services, healthcare, consumer cyclical, and communication services.

As a result, large companies like Apple, Microsoft, Nvidia, Amazon, Meta Platforms, and Alphabet have a big  role in the fund. The top-ten companies account for about 34% of the fund, making it relatively risky.

The S&P 500 index does well in good times for technology companies. It then underperforms the market when these companies are not doing well. However, since tech has done well in the last decade, the fund has done much better than other ETFs.

The Invesco S&P 500 Equal Weight ETF solves the concentration problem by ensuring that all companies in the fund have an equal weight. As a result, the fund often tilts towards smaller companies in the S&P 500 and reduces risks.

Unlike the S&P 500 index, the RSP fund is mostly made up of industrials, financials, technology, healthcare, consumer discretionary, and consumer staples. Industrials account for 15.8% of the fund while financials, tech, and healthcare account for 14.9%, 12.5%, and 12.5%, respectively.

The biggest companies in the RSP ETF are Kellanova, Mohawk Industries, DR Horton, CBRE Group, Fair Isaac Corp, Globe Life, GE Vernova, and Iron Mountain. 

Kellanova, formerly known as Kellog, will exit the fund soon as it was recently acquired by Mars in a $36 billion deal. Mohawk Industries is the biggest flooring company in the world, with a big market share in carpets, tiles, countertops, and wood flooring. 

DR Horton is a large restaurant brand while CBRE Group is a leading commercial real estate services provider. The other notable company is Iron Mountain, a REIT that focuses on data storage and data centers.

Catalysts for the RSP ETF

There are a few catalysts that could push the RSP ETF higher in the coming years. First, historically, while the RSP fund has lagged behind the S&P 500 index, it has done well. Its stock has jumped by 168% from its lowest point in 2020. Excluding dividends, the fund has jumped by 751% since its inception in 2003.

Second, the RSP ETF is relatively cheaper than the other funds that track the S&P 500 index. It has a trailing P/E ratio of 17.9 and a price-to-book ratio of 3.04. The SPDR S&P 500 (SPY) and the Vanguard S&P 500 (VOO) have P/E ratios of 23 and a price-to-book multiple of 4.71.

Third, the fund will likely benefit from the Federal Reserve interest rate cuts, which are set to start on Wednesday. Economists expect the bank will slash interest rates by either 0.25% or 0.50%. 

The main headline in the decision will be what the bank officials like Jerome Powell say after the meeting. The expectation is that they will maintain a more dovish tone, meaning that they will point to more rate cuts.

RSP and other stock ETFs do well when the Federal Reserve is cutting interest rates as we saw during the last cutting cycle in 2020 and 2021.

Fourth, the fund will benefit from the strong quarterly financial results by American companies. FactSet estimates that companies in the S&P 500 index will have revenue growth of 4.9% in the third quarter, the fifth quarter of consecutive growth.

There are signs that American companies are doing well, with the number of those mentioning inflation in their earnings calls falling to the lowest point in 2021.

RSP ETF technical catalysts

RSP chart by TradingView

The other catalyst for the RSP ETF is its technicals. On the weekly chart, we see that the fund has been in a strong bull run, and most recently, it crossed the important resistance point at $157.85, its highest point in January 2022 and its previous all-time high.

The equal-weight fund has remained above the 50-week Exponential Moving Average (EMA) while the Average Directional Index (ADX) has moved to 27, meaning that it has a strong uptrend. 

Therefore, the fund will likely continue rising as bulls target the next psychological point at $200. 

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Nigerians are bracing for more economic weakness after the local currency plunged to a record low against the US dollar. The official USD/NGN exchange rate soared to a record high of 1,645 on Monday as it crossed the important resistance point at 1,628, its previous all-time high. 

The currency has plunged by over 112% in the last 12 months and by almost 90% this year, making it one of the worst-performing currencies globally. 

Another risk emerges

The Nigerian naira plunge is facing another big risk as the price of crude oil retreat. Brent, the global benchmark, dropped below $75 for the first time in months. Similarly, the West Texas Intermediate (WTI) moved to $69.

There are signs that oil prices will continue falling. For one, the number of active rigs in the US has been in an uptrend in the past few months to stand at 485. 

At the same time, hedge funds are still pessimistic about oil prices. A report by the Commodity Futures Trading Commission (CFTC) showed that speculative net positions by hedge funds dropped to 140k last week from 177k a week earlier. These net positions peaked at over 700 a few months ago.

Oil is an important commodity in Nigeria since it is the biggest export commodity. In 2023, oil exports totalled over $52 billion while petroleum gas jumped to over $9 billion. Therefore, falling oil prices mean that the country’s dollar receipts maybe under pressure in the near term.

Falling oil prices could benefit Nigerians slightly though since refined petroleum imports totalled over $20.7 billion in 2023. Analysts expect that Nigeria’s imports of these products will fall slightly now that Dangote’s refinery has started to refine gasoline.

Nigeria central bank decision ahead

The next important catalyst for the Nigerian naira will be the upcoming interest rate decision by the central bank.

Analysts expect that the CBN, which has been hiking interest rates will pause when it meets this month. The pause will allow the bank to see the progress on inflation, which is showing signs of stabilizing. 

Recent data shows that the headline Consumer Price Index (CPI) rose 32.2% in August from 33.4% in July. It has moved to its lowest level in over six months, helped by the receding impact of last year’s devaluation and fuel subsidy removal. 

Inflation has also eased because of the recent decision by the government to remove duty on wheat imports and higher corn yields. 

The CBN has hiked interest rates to 26.75% to deal with the elevated inflation. Higher interest rates tame inflation by reducing consumer spending and incentivising savings in government bonds. 

However, the Nigerian naira is still not attractive to money market investors since the yield is smaller than inflation rate. In a note, analysts at Bloomberg noted:

“Inflation’s gradual slowdown will likely see it falling below 30% in early 2025. Moderating inflation and a tough economy support holding interest rates next week.”

Why the Nigerian naira is falling

There are numerous reasons why the Nigerian naira has imploded even as other currencies like the South African rand and Kenya shilling rise. 

First, the crash is a sign that the Nigerian economy is not doing well, as many manufacturers close shop. It is estimated that 700 manufacturers in the country closed their businesses in the first half of last year. Some foreign companies like GlaxoSmithKline (GsK) and Procter & Gamble (P&G) left the country last year. 

Many Nigerian businesses are struggling because of the rising borrowing costs, which are mostly untenable. This explains why default rates are rising in the country. 

Second, the Nigerian naira crash is also because of the falling foreign cash in form of venture capital in the country. While many Nigerian companies are receiving investments, the trend has been moving in the opposite direction. Nigeria attracted $1.75 billion in venture capital in 2021, a figure that dropped to $410 million last year. 

Third, the central bank is working to clear the dollar backlog with companies that has weighed investments. The government is also considering selling oil to Dangote in local currency. 

Nigerian naira outlook

The Nigerian naira’s short-term outlook is relatively scary, meaning that it could continue falling. If this happens, the USD/NGN exchange rate  will likely continue rising as bulls target the next key resistance level at 1,700.

In the long-term, however, the Nigerian currency will likely bounce back as we have seen with other countries like Kenya and South Africa. In Kenya, the shilling crashed to 160 earlier this year and has now bounced back to 150.

Besides, the Nigerian government is taking measures that have been welcomed by top lenders like the IMF and the World Bank. For example, it has removed the fuel subsidy that was costing it $10 billion a year while 68% of its revenue is now used to service debt, a big improvement. 

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The recently launched Zimbabwe ZiG continued its downward trend this month as concerns about the economy rose. The official USD to ZIG exchange rate started the month at 13.86 and has risen to 13.95, a 0.65% increase. It has risen by over 4.81% since its inception in April.

The black market rate has been worse. According to ZimPriceCheck, 1 USD to ZiG ranges from 18 to 26, meaning that it has dropped by almost 100% since its launch in April. Here are a few reasons why the Zimbabwe ZiG faces major headwinds ahead.

Consumer and business confidence is still low

The main reason why the Zimbabwe ZiG faces major risks ahead is that consumers and businesses still lack confidence in the local currency.

Many of these people have lost substantial purchasing power betting on the local currency in the past few decades. 

The first one was the collapse of the Zimbabwe dollar a few years ago that pushed hyperinflation to record highs. This happened as the Robert Mugabe government printed cash to fund its budget. 

A few years ago, the government launched a gold-backed currency followed by the recent RTGS Zimbabwe dollar. The latter collapsed by more than 80% in the first few months of the year.

When a currency implodes, people who have saved in it see their savings disappear. For example, assume that you had 1 million Zimbabwe dollar when it was trading at 100 to the US dollar. In this case, you had $10,000. However, when it moved to 200, it means that you have $5,000. 

Therefore, it will be difficult to convince Zimbabweans to make their savings in the new currency. The same applies to people in countries like Turkey, Egypt, and Nigeria. 

Zimbabwe’s economy is not doing well

Meanwhile, the Zimbabwe’s economy is not doing well, as the country deals with the impact of a recent prolonged drought.

The drought has led to a substantial crisis, which has pushed the government to announce a radical policy to kill 200 elephants to feed the population.

Zimbabwe has also been forced to import food from other countries, leading to more US dollar demand. Also, there is a risk that the important tobacco crop will fail this year, leading to less dollar inflows. 

On the positive sign, Zimbabwe is benefiting from the ongoing gold surge, which pushed it to its all-tme high this week. Federal Reserve interest rate cuts will help to push it higher for a while. 

This is notable since Zimbabwe is one of the top gold producers globally. It produced over 37,355  kilograms in 2022, a figure that has likely risen. 

A recent report showed that foreign currency receipts rose by 10% in the first half of the year because of gold and remittances.Other commodities like nickel and lithium have risen slightly in the past few weeks.

Zimbabwe dollar reliance

The Zimbabwe ZiG will likely face pressure because the country is mostly a dollar economy. Most companies, shops, and even small businesses mostly deal with the US dollar. In most cases, those that accept the ZiG convert their cash to US dollar afterwards. 

Data by the Zimbabwe Central Bank shows that over 60% of all transactions are in US dollar, and this trend will likely continue. 

Zimbabwe’s central bank hopes to fully transition to the ZiG in 2030 while the government expects the move to happen soon. 

While these government measures will lead to more ZiG usage, in the long term, more people in the country will move to the US dollar. Just last week, the central bank governor warned that he would double efforts to tame the currency’s saboteurs., 

Untested experiment

The other reason why the Zimbabwe ZiG faces a tough future ahead is that it is an untested experiment.

For starters, the Zimbabwe ZiG achieves its value by being backed by US dollars and gold reserves. The central bank hopes to continue adding into these reserves while the government has hinted that it will not order more currency printing to fund the budget.

The reality, however, is that the Zimbabwe ZiG is an untested experiment that no other countries have done in the past. 

Instead, many countries directly back their currencies to other major ones. In the South African region, countries like Namibia and Eswatini have backed their currencies to the South African rand. The Hong Kong dollar is pegged to the US dollar.

To ensure stability, these central banks often intervene in the forex market, especially when there is strong dollar demand. It is unclear whether Zimbabwe’s central bank has the resources it needs to do these interventions. Recent reporting by Bloomberg shows that the central bank has injected $190 million in the forex market to meet demand for dollars.

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The British American Tobacco (LON: BATS) share price has done well this year, making it one of the best performing companies in the FTSE 100 index. It has jumped by 32% this year while the FTSE 100 index has risen by less than 10%. 

Growth and dividends

BAT’s stock performance has coincided with the ongoing strong performance of other companies in the tobacco industry. 

Altria, one of the biggest tobacco companies, and the manufacturer of Malboro, has risen by over 36% this year. Similarly, Philip Morris International (PM) has soared by almost 40%.

This performance is mostly because investors have reduced their focus on Environment, Societal, and Governance (ESG) issues. As a result, ESG funds have shed billions of dollars in assets in the past few months. 

Tobacco companies were some of the most avoided companies by ESG investors because of their impact on society. Most tobacco companies are accused of causing health issues, mistreating tobacco farmers, and contributing to carbon.

British American Tobacco is also loved by investors who are looking for dividends. In addition to the stock rising by over 32% this year, the company is one of the most generous in terms of dividend payouts. 

BAT has one of the highest dividend yields in London. It pays about 9.50%, meaning that a £10,000 investment will bring in £950 in dividend payouts. Combined with dividends, BAT’s total return has risen to over 40% this year, outperforming the S&P 500, which has returned 18%.

New categories doing well

BAT’s performance is notable because of the challenges the company has gone through in the past few years. 

These woes came to light in December last year when the company caught the market by surprise after deciding to write down $31.5 billion of its US business. It attributed this write down to the slowing economy, the ongoing shift towards vaping, and the rising competition in the country. 

$31.5 billion is a lot of money for a company whose market cap stands at about $85 billion after its stock surge this year. 

The stock has done well even after the company’s financial results came out short than expected. 

Its first half financial results showed that the company’s revenue dropped by 8.2% to £12.34 billion. This revenue dropped even after the number of consumers of its smokeless products jumped to over 26.4 million.

BAT’s revenue from new categories, which includes vapes, also dropped by 0.4% to £1.65 billion while its profits from operations dived by 28.3% to £4.2 billion. 

Its performance is a reflection that the tobacco industry is still seeing slow growth globally. A key factor is that the number of smokers is not growing. The situation is even worse among the younger generation.

A good example of this is that BAT’s revenue slowdown was mostly because of its US business whose combustibles revenue dropped by 8.5%. The rest of world revenue rose by just 2.2% during the first half of the year.

Another example is that the revenue slowdown is spread across other companies in the tobacco industry. Altria’s revenue dropped to $5.2 billion in the last quarter from $5.4 billion in the same period in 2023.

The only company that had growth in the quarter was Philip Morris whose revenue rose from $8.9 billion to $9.46 billion. 

On the positive side, British American Tobacco’s new categories business is now accounting for a big share of its total revenue, which is its goal. It now accounts for about 18% of the total revenue and the management expects the figure to continue rising. 

Good valuation but risks remain

BAT has attractive valuation metrics. It trades at a forward non-GAAP PE ratio of 8.30, lower than the industry average of 18. It also has a forward GAAP PE multiple of 10, lower than the industry’s average of 20.

Tobacco companies always attract lower valuation multiples compared to other firms because of their slow growth and the fact that the sector is seen as toxic.

There are two main risks for BAT. First, it is unclear whether the company’s growth in the new categories will be long-lasting. Second, over time, it will see weaker cigarette growth since many young people are not interested in smoking.

British American Tobacco stock analysis

Turning to the weekly chart, we see that the BAT stock price has been in a strong bull run this year. It has jumped from a low of 2,076p in January to a high of almost 3,000p.

The stock formed a golden cross pattern as the 200-day and 50-day moving averages have made a bullish crossover. In most periods, this is one of the most popular bullish signs.

The stock has also formed a cup and handle pattern, a popular bullish sign. Therefore, the stock will likely continue rising as bulls target the upper side of the cup at 3,023p. It will then consolidate to form the handle section and then resume the uptrend.

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