It looks to me like the loincloth isn't swaying, but rather that it's moving with his legs, if you notice, it seems to be bent at the same angle as his legs, which leads me to think that it doesn't have physics, it's just physiqued to move with the legs. Nothing I've seen of the game seems to indicate cloth physics to me, admitably, the only gameplay footage we've seen is from the one trailer, still, going by that, it doesn't look likely to me.
ecause its crazy to think every bit of clothing would be dynamic.
I'd argue it wouldn't need to be anyway, if it's just a plain shirt, any physics it might have probably wouldn't be too noticable anyway, it's with things like cloaks or robes with large sleeves that tend to hang down that you'd want cloth physics, and while admitably we haven't seen anything to that effect, I still say that nothing we've seen seems to suggest that cloth physics are used on ANYTHING