Investment Professionals
Europe Stacks up Despite Brexit
Mar 14, 2019
Europe Stacks up Despite Brexit
Product in Focus: ETFS EURO STOXX 50 (ESTX)
Brexit uncertainty has impacted on investor sentiment
towards Europe
.
However there are multiple indicators that the
negativity around the rest of Europe has been
overdone
.
EURO STOXX 50 up 9.4% year to date in line with
S&P 500
.
Europe will always be a core part of investor portfolios.
Perhaps now is a good time to allocate?
Uncertainty surrounding the protracted Brexit negotiations has seen many investors shy away from European equity markets in favour of higher returns in the US.
Yet, with the US economy looking increasingly vulnerable to a slowdown, it might be time for your clients to refocus their sights on Europe – 20% of the world’s GDP.
Why have Australian Investors Been Wary of Investing in Europe?
Economic conditions in Europe have been surprisingly resilient throughout the political to-ing and fro-ing that has accompanied Brexit. European stock prices, however, have lagged their US counterparts.
In 2018, the primary benchmark EURO STOXX 50 Index fell by around 14.3%, compared to a decline of just 6.2% by the S&P 500 during the same period. Poor performance by banking and auto stocks due to jitters around interest rates and tariffs, respectively, were the primary factors depressing European markets last year.
Investor sentiment on Europe has been dampened by a range of factors. The cloud over Brexit, and its likely impact for the UK and continental Europe, is the obvious culprit. Ongoing budgetary conflict between Italy and the European Union, fears of an escalation in global trade wars and speculation on when the European Central Bank will raise rates, have also weighed heavily.
But Do These Fears Stack Up?
So far in 2019, it is a different story. The EURO STOXX 50 is up 9.4% year to date, tracking similarly to the S&P 500 (also up 9.4%) and relative valuations look more attractive. The euro is also approaching two year lows, which could provide a boost to Europe’s export sector.
There are also suggestions that underlying economic conditions in the powerhouse economies of Europe are stronger than sentiment would suggest. This view is supported by the release earlier this month (March) of the Markit Eurozone Composite PMI numbers for February which were revised upwards to 51.9, the first increase (albeit slight) in private sector activity in three months. The PMI index tracks business trends across manufacturing and services based on data from over 5,000 companies.
Another sign that the negative sentiment around Europe might have been overdone is the Citibank European economic surprise index. This index (which measures data surprises relative to market expectations) while still in negative territory, has been ticking upwards since the beginning of the year.
Emotions Do Not Equal Facts
The tendency for sentiment to run at odds with economic reality was raised recently by Martin Beck, chief economist at Oxford Economics. He spoke of the “the difficulty of separating emotion from hard economic developments in driving survey responses” during times of high uncertainty.
A number of factors underscore the view that Brexit uncertainty is having a disproportionate impact on investor sentiment. Unemployment across Europe continues to fall and is at 10 year lows, wages growth has picked up and German retail sales rebounded in January, rising more than 3%.
….And What About BREXIT
So how great are the Brexit risks for European stock performance?
Certainly the economic fortunes of the UK are deeply entwined with those of the EU. The UK is among the EU’s three largest trading partners, accounting for about 13% of its trade in goods and services.
While Brexit uncertainty has been damaging for both the UK and the Eurozone, the worst case ‘no deal’ scenario is likely to hit UK companies much harder than their European counterparts. The IMF has forecast that a no deal Brexit could result in a 4% hit to the UK’s GDP BY 2030 should Britain end up adopting the default World Trade Organisation rules for its trading relationships with the EU.
The two countries with the largest weighting in the EURO STOXX 50 index, France and Germany by comparison are expected to suffer declines of only 0.2% and 0.5% of GDP, respectively.
Meanwhile, a more benign Brexit scenario preserving access to the single market but not membership of the customs union would have only “negligible” impact on output and employment for the EU, according to the IMF.
The ultimate consequences of Brexit for both the UK and Eurozone countries, however, are likely to take many years to materialise and will depend on whatever shape any eventual deal takes.
Europe Without the UK - ETF Securities’ EURO STOXX 50® ETF
As with any late cycle investment strategy, the key to any European foray is to focus on quality companies with strong earnings track records.
To this end, Europe offers some of the world’s most prestigious blue-chip names. The EURO STOXX 50, includes the 50 largest and most liquid stocks operating in the Eurozone.
The top 10 stocks in the EURO STOXX 50 Index (which is updated annually) are Total, SAP, Sanofi, Linde, Allianz, LVMH Moet Hennessy, Siemens, Unilever, ASML Holdings and Banco Santander. For investors looking to gain exposure to Europe, exchange traded funds offer a way to gain widespread diversification at a low-price.
The ETFS EURO STOXX 50® (ESTX) offers broad based exposure to the 50 largest companies across the Eurozone by tracking the performance of the EURO STOXX 50 Index. For the year to date, ESTX is up 8.0% (in AUD).
Source: Bloomberg data as at 11th March 2019
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Here's the Buzz around Megatrends
Feb 18, 2019
Here’s the Buzz around Megatrends
Products in Focus: The ETF Securities Future Present Range
Q4 2018 saw high levels of volatility that particularly
affected the tech sector and high beta areas of the market
.
YTD performance in 2019 has seen a rebound of many of
these stocks
.
In this article we explore some of the key drivers of growth
in the future
.
In the long term there is a positive outlook for technology,
robotics, battery tech and biotechnology.
At ETF Securities, we often talk about megatrends; disruption, displacement, game-changing and
revolutionary technologies. Whilst it is easy to become cynical about the overuse of these terms, it’s
clear that the pace of change is accelerating with no signs of slowing. Since 1956 there has been more
than a trillion-fold increase in computing power where today the power of the iPhone 6 (an already
outdated technology) could theoretically guide 120 million Apollo 11 rockets at once.
Taking a step back, the greatest driver of this advancement is simply the enormous expansion in
computing power. We now have capabilities to capture and analyse immense quantities of data, and
this knowledge is being applied to a wealth of areas, with many of these technologies previously
restricted to the realms of science fiction.
The ETF Securities Future Present range gives investors a way to access disruptive technologies in a
diversified manner. The range includes four funds targeting different sectors that are looking to have a
greater presence in the future:
TECH: ETFS Morningstar Global Technology ETF
Once seen as a highly speculative investment, technology has now firmly cemented its place at the top
of the S&P 500. It is fair to say that most people are highly dependent on leading tech firms that have
become exceedingly integrated into our lives.
We wake up, check the weather on our Apple iPhone, cycle to work on that (pricey) Cannondale and
track the ride on our Garmin. Once at the office, the computer is booted up and Microsoft Office
provides the tools to get us through the day.
These technologies are ubiquitous and as such it is important to know the different ways of gaining
exposure to the companies behind them. TECH holds a basket of 32 global technology stocks that have
been identified using Morningstar’s moat methodology, meaning they have a competitive advantage
over other similar businesses. With Morningstar’s active influence in this fund, it has outperformed the
Nasdaq 100 since it was launched in April 2017.
ROBO: ETFS ROBO Global Robotics & Automation ETF
While the tech sector is dominating the present, it’s robotics, automation and AI (RAAI) that looks set
to dominate the future.
The outlook for growth in RAAI looks bright and with recent volatility providing increasingly attractive
valuations in this sector, is now the time to consider to invest in this thematic?
This year industry experts are pointing to improvements in network capabilities, particularly the roll
out of 5G networks, aiding growth across the board, with the upgrade from 4 or 4.5G yielding as much
as 10-100 time improvements in network speeds. These enhancements are instrumental in enabling the development and implementation of other technologies. Can you imagine using Netflix in the days of
dial-up internet?
Further penetration of manufacturing robots is also expected to occur as the automation of the
workforce continues. Today’s China has approximately 1 robot per 100 manufacturing workers, with
huge scope for growth if it’s to reach ratio’s in line with Germany and South Korea’s 6 per 100. These
robots are performing monotonous tasks with high levels of precision and increasingly lower costs than
their human counterparts, meaning companies will need to keep up with the levels of automation their
rivals are using to keep up with the competition.
ACDC: ETFS Battery Tech & Lithium ETF
Global climate change and the move towards renewable energy is one of the most pressing issues of
today and one of the key drivers of our success in addressing this issue will be in the development of
energy storage. Imagine a world where battery technology is efficient enough to fly planes and feed
power stations – this is the world companies behind this technology are striving for, and we’re already
on our way with the explosion of electric vehicle development.
But it’s not just electric vehicles making advances. In classic Musk fashion, Elon managed to make
batteries the talk of the town in 2018 with his 100-day delivery of the Hornsdale Power Reserve battery
in South Australia, currently the largest in the world. This drew attention for the necessity of pairing
renewable energy generation with practical storage solutions.
Whilst Tesla has had the first-move advantage in the electric vehicle (EV) market, it is rapidly being
chased by established car manufacturers like BMW, Volkswagen and Nissan, who have equally
ambitious goals to capture the growing consumer demand for green-transport. JP Morgan project EVs
and Hybrid Electric Vehicles (HEVs) will account for 30% of all vehicle sales by 2025.
CURE: ETFS S&P Biotech ETF
Whilst biotechnology is arguably one of the oldest forms of technology, its prospects for future
development are high. Since the first smallpox vaccine was administered in 1761, there have been huge
advances in the biotechnology field. The sequencing of the first human genome in 2003 enabled a
plethora of new biotech drugs to be developed.
DNA sequencing has created hope for those previously suffering incurable diseases and has provided a
quality of life where it was previously lost. At the time of writing 67 of the 119 stocks in CURE are either
researching or producing diagnostic tools or drugs that treat cancer. Therapies are being developed for
psychological disorders, inoperable tumours, chronic pain, hereditary diseases and degenerative
illnesses.
As an industry that is renowned for its volatility, biotechnology can be a particularly difficult sector to
choose a winner. For the uninitiated, it is a realm full of highly specific medical jargon, tied up with
regulatory barriers and inexplicable results to clinical trials. This is why CURE offers an equal weight
and broad exposure to the biotech sector. And whilst it is difficult to know who will be responsible for
the next breakthrough treatment, what we do know is that people will always pay for healthcare,
especially as our aging population grows. This is an industry where success does not just mean more
dollars in the bank, but lives saved, and families kept together.
The Future is Now
The examples above provide just a glimpse into the full scope of innovation that is captured by the
ETF Securities Future Present Range. The future is now, and the way we live and work will continue
to be defined by these mega trends. Accessing these sectors through a diversified, equal weight ETF
allows investors to take a view on what trends will dictate the times to come.
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Gold 2019 Outlook
Jan 21, 2019
Gold 2019 Outlook
Gold had a positive return of 9.4% in 2018
2019 is looking to experience further geopolitical instability, particularly:
US/China trade tension
Continued uncertainty around Brexit
Gold net non-commercial long contracts have been on the rise since October 2018
Does it take a market correction to see the value in gold?
2018 wrapped up in a storm of volatility. Markets up for the first three quarters and down thereafter through to late December. Consequently, leaving investors wary of what may be on the horizon. Though we have entered a fresh year, many of these volatility drivers still exist as they remain unresolved.
Looking at the geopolitical landscape, 2019 is likely to present events that will continue to affect market sentiment. Trade tensions between the US and China remain, Brexit is fast approaching the original deadline and elections are upcoming in India, the EU and Australia, with all expected to play a role in shaping the year ahead.
With this continued uncertainty, defensive strategies and diversification shall continue to be on the mind of many.
How did Gold weather the storm?
The tail of 2018 saw gold perform as a good hedge against equities. Whilst the S&P/ASX 200 dropped 7.8% from October to December end, gold netted a 9.6% gain in this same period (Figure 1), which indicates inclusion of gold into a portfolio for the period could have reduced volatility and downside risk
Examining several major indices across 2018, ETFS Physical GOLD had a positive return of 9.4% whilst all major equities were in the red (Figure 2).
Gold outlook for 2019
The outlook for 2019 performance will likely be impacted by a continuation of the global themes that dictated the close of 2018. In the World Gold Council’s “Outlook 2019: Economic trends and their impact on gold”, it has outlined three important drivers of gold demand: financial market instability, the impact of rates and the dollar and structural economic reforms
The political instability that has enveloped the leading economies of the US and the UK is set to continue with markets responding to ongoing turmoil. The protectionist attitude of the US has encouraged inflation, with gold used by many to hedge against this. These movements have heralded a renewed interest in gold which can be seen on multiple fronts. Net positive flows into ETFs have occurred for the previous three months, though Asian markets (including Australia) have lagged Europe and America on this front.
Futures have also pointed to change in sentiment towards gold. Net non-commercial long contracts have been on the rise since October 2018, reversing the downward trend seen throughout 2017 and most of 2018 (Figure 3).
The bearish view of gold suggests that performance could be constrained by a strong US dollar and rising interest rates. Addressing these points; the significant price movements of the dollar in recent weeks makes the price outlook of the dollar particularly tricky to predict. Examining the relationship between gold and interest rates, these have seen a degree of positive correlation in the past although not to a particularly significant degree.
Finally, economic reform is expected to continue across China and India in 2019. As the greatest consumers of physical gold (through both investment and jewellery), economic growth in these regions will likely impact the precious metal. Further economic development and particularly the increase of wealth in India and it’s growing middle class is likely to continue to drive demand.
On balance key indicators that have dictated the previous performance of gold suggest that we are likely to see a continuation in the upward trend of both investment flows and price of gold.
Investors wanting to access gold may be interested in the benefits of exposure through investing in gold miners’ equities. Whilst this strategy gives the potential to receive dividends it does not offer the same exposure of a physical gold ETF such as GOLD as the price changes in gold miners can be quite different from the movement of gold price.
The mining industry has recently garnered attention due to large M&A movements. Significantly Goldcorp will be acquired by Newmont Mining in a US$10bn deal. Subsequent to this announcement Newmont’s share price dropped 11% overnight.
For investors who are utilising gold as an event risk hedge, other factors such as M&A activity can have unexpected effects on gold miner’s share prices. Therefore, a direct exposure to physical gold will eliminate exposure to stock specific risks.
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Why aren't you looking at Gold?
Jan 08, 2019
GOLD
100% physically backed
Highly recommended by Lonsec
Recommended by Zenith
Key features of Gold:
Can materially reduce risk in portfolios
The best-known hedge against the business cycle
Outperformed cash since the 1800s
Hedge against geopolitical events
Global trends around Gold investment:
Global Gold ETF investment flows have moved to positive for the first time since May 2018
Central banks have increased buying of gold to the highest level since the end of 2015
Gold is the world’s oldest financial asset and has been used for centuries in transactions and as a store
of value. However, many Australian investors are hesitant to allocate assets to gold, with the lack of
yield being a common concern. We believe investors should consider the role of gold in a portfolio,
particularly with the recent volatility being experienced across the globe.
Key features of gold
1. Gold can reduce the risk of a portfolio
The most efficient portfolio is one that takes the least risk while making the highest return. Risk can be
reduced by diversifying across and within asset classes based on low or negative correlations. Gold has
low or negative correlations with traditional asset classes making it ideal as a risk reduction tool.
2. Gold has outperformed cash since the 1800s
In a review of every major US asset class, Jeremy Siegel, a professor of finance at the University of
Pennsylvania, found that gold provided investors with a real return of 0.5% from 1802 to 2016. He
found that while gold was beaten by bonds and equities, gold outperformed cash, with cash delivering
a negative real return of -1.4%.
3. Gold acts as a hedge against geopolitical events
Gold has had an historical tendency to rise during times of crisis and turbulence. This means gold can
provide something like an ‘event hedge’ – or the chance to reduce the impact of ‘black swan’ type events
which, while relatively uncommon, can have a strongly negative impact on a portfolio.
Taking the well-known example of the GFC (below) it can be seen that the difference between gold and
the equity markets one year on from the credit crisis was 35% in favour of gold.
Global trends of Gold investment
Recent global movements have shown many investors are reallocating to gold. On this front Australia
is lagging behind global trends with other regions showing a greater propensity for an allocation to gold.
We have seen this increased appetite for gold emerging on multiple fronts:
Gold ETF investment flows have moved to positive for three consecutive months (October-December) with 3% growth in ETF holdings in 2018
The total value of global gold backed ETF holdings in now over $100bn for the first time since
2012
Central banks have increased their buying of gold to the highest level since the end of 2015
What does gold look like in a portfolio?
To demonstrate the effect of gold in a portfolio we have simulated the past performance of a series of
Vanguard “LifeStrategy” funds with and without a 10% allocation to gold. Simulations were run over a
15-year period (since inception of ETFS GOLD).
These funds provide an all-in-one portfolio made of globally diversified blends of equity and bonds
(proportion equities & bonds indicated in charts below). In every case, the portfolio including a 10%
allocation to GOLD outperforms and has lower beta and standard deviation indicating a lower risk.
Based on this it’s clear gold does exactly what it’s meant to do from an investment perspective and we
believe that many Australian investors are ignoring these risk reduction properties.
Conclusion
Gold is the oldest known store of value and has been continuously used for this function for centuries.
We have demonstrated above the key features of gold that make it an appealing option for some
investors. Gold’s low and negative correlations with other asset classes have seen it perform as an
effective hedge in previous bear cycles and during global geopolitical events that have negatively
affected other asset classes. Simulated data also demonstrates how this diversification can function in
a hypothetical portfolio to reduce risk and increase returns.
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Putting the Spotlight on Defenders
Nov 11, 2018
Key Takeaways
Recent market volatility has encouraged investors to position portfolios more defensively
ETF Securities has a selection of products more suited to a defensive strategy
ZYUS gives a low volatility approach to the US market
CORE gives exposure to the historically more stable infrastructure sector
GOLD provides the best-known hedge against equity market downturn and political instability
Introduction
Investors have battened down the hatches over the past weeks as waves of volatility have dominated the market. Maybe the market calms down and equities resurge, but now, is clear, that late cycle volatility is here and will probably become more violent at each episode.
The recent equity sell-off has heightened uncertainty, with consumer sentiment nicely described by the
CNN ‘Fear and Greed Index’ that looks to characterise the primary emotion driving the market (see
below).
Right now, this index sits at 11, or ‘extreme fear’. Why? The consensus among investors appears to be
that we’re in the ‘late stage’ of the investment cycle. Wall St’s thundering run has lasted a decade – the
longest ever. And the market has become increasingly wary because of that.
We have seen a very large sell-off in technology sector stocks with the Nasdaq, which is often taken as
a proxy for US tech, recording its worst month since 2012. This suggests that some are losing faith in
the continued performance of our recent equity stars (otherwise known as team FAANG).
Adding fuel to the fire, the world has been curiously watching on as China and the US continue their
game of trade policy tag. As the reverberations of any decisions by these heavyweights are felt by all,
this tension is creating a difficult environment for investors.
Playing Defence
Though we are all familiar with the old adage ‘past performance is not an indicator of future
performance’, it is sometimes helpful to look back at how previous storms have been weathered.
The traditional market response to a late cycle downturn can generally be characterised by a move away
from higher risk equities such as technology or emerging markets, greater focus on essential sectors
such as healthcare, utilities and energy, and a general movement away from equities and into cash,
short-term fixed income and commodities. As the bull market nears the close of its tenth year many are
considering if now is the time to reposition portfolios towards ‘defensive’ assets.
So, what are the options for investors looking to rearrange their holdings into a more defensive position?
** Gold is not considered in the risk illustration for two reasons. First, there is no counterparty risk with
gold whatsoever (with cash there is still sovereign risk). Second, gold has historically had low
correlations with equities, so its risk characteristics work differently.
Defensive Equity Solutions
America
If you take a glance at global headlines, the US right now may seem a difficult market to play, with high
levels of uncertainty around international policy and tariffs.
However, as the world’s dominant economy, many would wish to maintain some sort of equity exposure
but with a defensive tilt and an eye on capital preservation as much as growth. The ETFS S&P 500
High Yield Low Volatility ETF (ZYUS) is one option that is designed to achieve this.
As suggested by the name, this ETF has a low volatility filter built into its index construction. The
underlying assumption is that companies that don’t exhibit aggressive price movements are less likely
to be sold down heavily in a general market sell off.
Specifically, the index universe (the S&P 500) is ordered to select the 75 highest yielding stocks and
then the 50 least volatile of those 75 are selected creating a high dividend paying, relatively low risk
portfolio based on the trailing twelve months of price data.
With reference to the chart above it is clear to see that, since the VIX jumped in October, IVV has lost
approximately 10% whereas ZYUS has only lost 4%.
Part of the reason for this is because ZYUS has a 16% greater exposure to utilities (historically low in
volatility) whilst a 17% less to information technology (historically high in volatility) (as at 30th August
2018, source: S&P).
Infrastructure
Another strategy investors may consider in times of heightened volatility is increasing the allocation to
sectors that have historically had greater stability. One such area known for this is infrastructure. The
source of this stability can be explained by looking at the industries that fall into this sector: utilities,
telecoms, industrials and transport.
These industries typically have high capital costs, low elasticity of demand, long business timelines
and often exist as regulated oligopolies or monopolies. Their capital-intensive nature means that they
are very difficult and, in some cases, like energy distribution networks, nigh impossible to disrupt.
This can mean that these sectors have lower risk (as measured by standard deviation of returns) than
other sectors, such as technology or real estate. The table below illustrates the substantially lower
volatility of infrastructure against these sectors.
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Global Infrastructure: Designed for Retirees
Oct 07, 2018
Key Takeaways:
• Infrastructure assets are considered by many advisers as
ideal for retirees
• CORE gives a cost effective, diversified and international
exposure to this sector
• CORE has outperformed many active funds over the
past year, debunking the myth that active is always best
in this sector