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ETF Securities Partner Series: Investment Ideas for 2021
ETF Securities Partner Series: How will the U.S. election impact Australian investors
ETF Securities Partner Series: Recharge your portfolio with battery technology
ETF Securities Partner Series: Growth vs value in uncertain times
Dec 23, 2020
India is tipped for extraordinary growth in coming years, reaching GDP of $US9 trillion by 2030 and overtaking the US as the second largest economy in the world by 2050. Even today, the value of the National Stock Exchange of India (NSE) exceeds the Australian market. The 50 largest blue-chip Indian companies as ranked by the NSE Nifty50 Index are valued at $A1825bn, representing approximately 60% of the market capitalisation of India. While Australian investors may be unfamiliar with India’s largest companies, many of these are not only dominant globally but supporting future growth in India. Kanish Chugh, Head of Distribution for ETF Securities, spoke to Kinjal Desai, Overseas Fund Manager – Equities for Nippon Life India Asset Management about five of the largest listings in the NSE Nifty50 Index and how they are driving India’s rise. The ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) tracks the NSE Nifty50 Index, offering Australian investors exposure to the India economy. Servicing India and the world Some of India’s top companies exceed the entire S&P/ASX 200 in market capitalisation and may have a greater role in driving global growth, in addition to the Indian economy, than Australian investors realise. We explore five of these companies below. 1) Reliance Industries (11.1% weight in ETFS Reliance India Nifty 50 ETF as at 21st Dec 2020) Ms Desai says, “It is the largest private sector enterprise, started in the oil and gas segment with exploration and production and now its actually moved onto retail (consumer electrics, fashion and groceries) and telecom services. Reliance actually has the single largest complex refinery in the world.” It has been working aggressively to expand its consumer activity. On the telecommunications side, it offered users free internet calling for one year and invested heavily in data services and capacity which has driven it to more than 30% market share in the mobile space. On the retail side, it has recently purchased Future Group – the first to launch hyper stores in India – and its Whatsapp grocery order system called JioMart increased in popularity during lockdown. 2) Hindustan Unilever (3.56% weight in ETFS Reliance India Nifty 50 ETF as at 21st Dec 2020) The largest consumer staples company in India, it has direct coverage of 3.5 million outlets and around 88 million consumers within India. Ms Desai says, “Unilever have a 62% stake in Hindustan Unilever and it contributes about 10% to Unilever’s global sales. Premiumisation has been a very big story for this company and they have effectively done this across all their segments. One example has been laundry detergent. They have successfully created a pyramid of their own portfolio across different price points where even the most premium product is at an affordable price point allowing penetration even in rural areas. About 60% of India’s consumption takes place in the rural areas.” 3) Maruti Suzuki (1.72% weight in ETFS Reliance India Nifty 50 ETF as at 21st Dec 2020) Maruti Suzuki is the largest passenger car company in India and has 50% domestic market share. The COVID-19 pandemic has supported increased interest in personal vehicle ownership, with 57% of Indian consumers considering purchasing a car in 2020 compared to the global average of 35%. “It is a subsidiary of Suzuki Motor Corporation of Japan. It owns a 56% share. They are able to produce 1.6 million vehicles per annum. In addition to this Suzuki actually put up a dedicated plant in Gujarat as well. Overall, the penetration in India for individual vehicles is quite low. It’s expected to reach anywhere between 27 to 30%,” says Ms Desai. 4) Infosys (7.45% weight in ETFS Reliance India Nifty 50 ETF as at 21st Dec 2020) Infosys, India’s second largest provider of consulting and IT services across the globe with a staff headcount of more than 240,000 in nearly 50 countries. Infosys’ proprietary software Finacle is considered an industry-leading program and used globally. “It is one of the fastest growing IT service organisations globally and a leader in the offshore service space. The US and Europe actually make up almost 85% of their revenue. Finacle is used by leading banks in India, the Middle-East, Africa and Europe. Infosys has been increasing local hiring over the past two to three years. It gives them a bit of an edge in the market. The company has changed its tactical allocation policies and that means they will be returning almost 85% of the free cashflow back to shareholders in the form of dividends and buybacks,” says Ms Desai. 5) HDFC bank (10.49% weight in ETFS Reliance India Nifty 50 ETF as at 21st Dec 2020) HDFC is the largest private sector bank in the country – noting that 60% of the Indian financial system is in the private sector). HDFC is focused on customer acquisition across channels, including digital with an emphasis on low-risk, short-duration working capital lending. Ms Desai says, “they’ve seen almost 15-20% CAGR over the past 10 years. They have been enhancing brand productivity and going into rural semi-urban populations and targeting the top 20-25% of that area. They’ve been creating a virtual relationship management strategy and targeting automation. They are currently servicing about 6 million people but are targeting 25-30 million customers through this.” How to invest in Indian companies It can be difficult for investors to directly access the Indian market for listed shares. From this perspective, investors could consider other options such as: - Direct investment in companies with business operations in India listed in Australia or internationally. - Actively or passively managed funds which focus on Asia, themes relevant to Asia or India or specifically focus on India. ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) is the only fund in Australia that offers exposure to the Indian economy via its benchmark index, the NSE Nifty50 Index. NDIA includes exposure to the 50 largest and most liquid companies listed on the National Stock Exchange of India (NSE) and represents more than 60% of the market capitalisation of India. References  https://www.cbre.com/research-and-reports/India-2030---Exploring-the-future  https://www.pwc.com/gx/en/issues/economy/the-world-in-2050.html  Source: Morningstar; Bloomberg; ETF Securities. Data as at 30 October 2020.  https://www.bloombergquint.com/business/jio-becomes-first-telco-to-cross-40-crore-subscribers-mark-trai-data  https://www.moneycontrol.com/news/business/reliance-retail-future-group-deal-how-will-it-benefit-rils-consumer-facing-businesses 5770431.html#:~:text=Reliance%20Retail%20is%20by%20far%20the%20largest%20retailer,chief%20executive%20of%20retail%20consultancy%20firm%20Third%20Eyesight  https://www.brand-experts.com/brand-best-practice/covid-19-impact-reliance-industries/  https://www.hul.co.in/investor-relations/  https://timesofindia.indiatimes.com/auto/news/maruti-suzukis-mpv-market-share-touches-50-as-xl6-completes-a-year/articleshow/77714792.cms  https://auto.economictimes.indiatimes.com/news/passenger-vehicle/cars/almost-57-indian-consumers-willing-to-purchase-cars-in-2020-survey/75672140  https://www.infosys.com/about.html  https://www.edgeverve.com/finacle/australia/
Dec 08, 2020
As an unusual and challenging year draws to a close, many investors may wonder what’s in store for 2021. The prospect of vaccines, a return to travel, and a more ‘normal’ life has given hope to a better year in terms of personal lives and has interesting implications for investing. Kanish Chugh, Head of Distribution for ETF Securities, spoke to James Gerrish, Senior Investment Adviser for Shaw and Partners and author of the investment newsletter, Market Matters, about the trends leading into the new year. Growth was the theme for 2020 In a year dominated by pandemic and bushfires, growth stocks were the key focus for investors, with many traditional value investments hit hard by lockdowns. “Growth stocks are dominated by IT names. They've benefited from lockdowns, they've benefited from more movement online, etc, and they've also benefited a lot over the last couple of years with declining interest rates,” says Mr Gerrish. The technology trend had already been playing out for some years, but the COVID-19 pandemic accelerated adoption as millions around the world were forced to switch their work and life needs to a virtual format. The FAANG stocks formed part of this surge in interest, with Australian investors using a range of entry points, such as the ETFS FANG+ ETF (ASX Code: FANG), to access the growth potential. While such stocks will continue to play an important role in portfolios going forward, Mr Gerrish believes that the outlook may be promising for values-based sectors in 2021. A return to value in 2021 Mr Gerrish says, “in Australia, we had the value index up around 17% in the month of November. The growth index in Australia was up around 5%. There's a huge rotation out of growth, into value in a relative standpoint.” He views this as an ongoing trend and expects value investments to outperform growth investments across the next year but warns against skewing portfolios too far away from growth given the longer-term trends and prospects involved. The reason for this movement towards value comes down to a favourable environment for such investments, assuming a vaccine comes into play in the new year. “We've got really supportive monetary policy around the world, so interest rates are at record lows, liquidity is high, we've got a growing support being provided by fiscal measures in Australia. We're going to be spending on infrastructure, that's going to be a theme around the globe. I think the market is in a really strong spot and could really surprise investors on the upside next year”, says Mr Gerrish. The sectors he views as particularly benefiting from this include financials, infrastructure and resources. He says, “the environment for banks is improving significantly. The loan growth is starting to come to fruition in the bank. We've seen a change in lending standards, which are supportive of loan growth. The long end of the yield curve is steepening, which is positive for bank margins. I think building stocks would do particularly well. I think there's been an underspend on new mine development over the last couple of years. And we're starting to see that through higher commodity prices. So, I think there's going to be some make-up there. If I think about resources, some of the lithium producers in the Australian market are really starting to show some form. The space is more mature now and we’re starting to see more sustainable capital go into that area of the market.” He notes the ETFS Battery Tech and Lithium ETF (ASX Code: ACDC) offers exposure to lithium miners as well as offering thematic exposure to renewable energy, a theme set to continue once US President Biden is inaugurated, given his vocal commitment to sustainable energy. In addition to value sectors, Mr Gerrish still views gold as an important investment in 2021, despite the drop in prices. He says, “I think we're going to have that concept of negative real rates for the next five years at least. Inflation running above interest rates is really supportive of physical assets like gold. There's one fund manager I met last week who rightly pointed out he can't print more gold. So he can print money, you can create cryptocurrencies and the like, but he can't print more gold. We're in the market today increasing our gold exposure.” Interested in using gold in your portfolio? Find out about ETFS Physical Gold (ASX Code: GOLD). A promising outlook for Australia? From an Australian perspective, the return to value and likely sectors to benefit could be supportive of the domestic market. “Our index has got banks and resources, which makes up about 40% of the index, whereas banks and resources make up about 15% of the S&P 500. So that's more skewed towards growth. I think it sets it up for a really high chance of Australia outperforming over the next 12, 18 months or so,” says Mr Gerrish. Interested in incorporating Australian investments in your portfolio? Find out more about ETFS S&P/ASX 300 High Yield Plus ETF (ASX Code: ZYAU). While positive on Australia’s outlook, he is conscious of potential risks, with two in particular concerning him. The first is interest rates. “Over time, they will be increasing interest rates. We've got an environment where investors have got used to record low interest rates. So there will be a tipping point.” The second is maintaining a close watch over the relationship between Australia and China. “It's deteriorated pretty markedly over the last couple of weeks. If that was to turn towards more of our important exports to China, iron ore namely, that could be a real risk for Australia. So, you know, I painted a really bullish scenario at the start of this discussion. The China relationship with Australia is probably one of those left field events that could bubble away in 2021,” he says.
Oct 28, 2020
The dominance of the U.S. over global markets has long meant that its Federal Elections also influence investment activity on an international scale. The 2016 results may have caused global surprise and changed the political sphere, but will the 2020 election cause similar upset? Kanish Chugh, Head of Distribution for ETF Securities, spoke to Timothy Rocks, CIO for Evans and Partners, and David Lane, Director and Senior Adviser for Pitcher Partners about the upcoming U.S. election and how it will impact Australian investors. Market activity and US election results Traditionally, the lead-up to and the period immediately following a U.S. election can cause some uncertainty in markets. This year has been a bit different. Mr Lane says, “when you historically look at markets reacting to U.S. elections, in most periods you actually find that the volatility of markets increases for the three months prior to the election. That hasn't actually been the case this year. We had so much volatility earlier in the year that last few months have been relatively modest in terms of volatility. So, you know, we can't necessarily always predict what's going to happen based on history, when history isn't necessarily repeating itself.” There are still some predictions to be made based on traditional views of parties as well as the policies each party has announced. Mr Lane says, “if Biden gets in and there is a blue wave*, there’s the potential that we could see a bit of a market sell-off on the basis that historically Democrats have not been as positive for equity markets. A number of the policies that Biden has is to increase company taxes and potentially have greater spending on healthcare.” On the reverse though, he notes that there is some suggestion that any COVID-related stimulus package offered by the Democrats could be larger than any offered by the Republicans which could actually be a positive for equity markets. As a whole, Mr Lane says, “I do think that the underlying economic environment, and COVID probably has a bigger impact on the outlook for markets than the actual result of the election itself.” Mr Rocks agrees but also underlines that the circumstances are far from normal. He says, “you could certainly argue that a Biden presidency would be a return to predictability in policy and general relations. I certainly agree that the blue sweep has the potential to give it more stimulus, not just in the short term, but also over the full administration if he enacts a lot of his infrastructures type sort of plans.” A Biden presidency could also play into one of the global themes, growth in Asian markets. Mr Lane says, “one of the geographies that we're looking at from an investment perspective is more Asia and moving money more into Asia on the basis that the Asian economies have come out of COVID quite well, compared to the rest of the world. And potentially if we do have a Biden victory, they may well be, or he may well be more amenable to negotiating a trade with China and the rest of Asia. So, you know, we could see a bit of a positive skew towards Asia into the future.” Predicting the outcome The polls to date have indicated that the Democrats, led by Joe Biden, are likely to have the lead. Whether the data can be trusted is a different question. The polls in 2016 predicted a decisive win to the Democrats under Hillary Clinton and were wrong but Mr Rocks believes analysis has been done to correct the problems of the past. Mr Rocks says, “the pollsters all determined that the real problem was that they were talking to not enough of the right people. In other words, that education plays a big role in voter preference, and that whether you live in a city, suburbs, or rural area played a big role. And so, they were underestimating those key demographics when they were talking to people, so they've made those adjustments now. They tried those new models out in the 2018 midterm elections, and they seem to work pretty well.” He views voter turnout as being the bigger uncertainty this year, citing a combination of greater interest as well as improved access to voting. “Previously there were significant constraints on pre-election day voting, on absentee voting, on mail-in voting, and now all states have allowed some combination of those and made it much, much easier. So as a result, you've seen this thing that 25% of people have already voted at this stage, two weeks out. That could be 50% or more, the way things are going,” says Mr Rocks. Positioning a portfolio during the US election Both Mr Lane and Mr Rocks believe that investors should hold to their long-term strategy, but the environment may open some opportunities for tactical movement. “I think this genuinely is a time that we should be defensive in our portfolios. I think we are more uncertain about the 3-5 year story for markets than we've ever been. You know, health crisis, what happens with vaccine, the macro. So, absolutely this is a time where you should maintain healthy levels of defensive assets, including cash and gold,” says Mr Rocks. Interested in investing in gold? Learn more. From a tactical perspective, both see healthcare as potentially benefitting from a Democrat victory. “Healthcare is that the one sector that will probably have the biggest impact. It is a sector that strangely enough has probably underperformed over the last six months in spite of everything that's been going on around the world, and the general increase in government spending towards healthcare. We still see overall the sector as being good value, but there's the potential of a short-term impact,” says Mr Lane. Considering an investment in healthcare? Find out more. According to Mr Rocks, banking and finance may also be a sector to watch as the Democratic platform has traditionally been focused in favour of regulation, with the Republicans in favour of deregulation, though neither party has promised anything either way. The technology sector may also be in the spotlight in coming months. He says, “there's lots of discussion about whether the big tech titans will be subject to increase privacy rules or antitrust campaigns. But having said that it's not clear whether the Democrats or the Republicans will be worse on that. In fact, the Republicans just announced an antitrust campaign, a suit against Google just last night. So the tech sector is probably in focus, regardless of the result, though.” An eye to the future? For both Mr Lane and Mr Rocks, the U.S. Election is something to monitor for Australian investors, but not necessarily something of particular concern. “The outcome will have some impact, but given what we've experienced over the last 12 months, there are so many other issues at play that really the U.S. election is only one of the many things that we need to be keeping an eye on,” says Mr Lane. Following in this vein, Mr Rocks says, “we really don't know how severe the health crisis will be, how long dated it will be, how successful vaccines will be, whether the macro environment will be able to continue to be relatively resilient to it. What will policy makers do? All these things are much more fundamental questions, when we think about how equity markets will perform over the next sort of three to five years.”
Oct 21, 2020
The future of renewable energy and electric vehicles (EVs) is heavily intertwined with the growing battery technology industry. Batteries are an older technology but recent innovation, particularly spurred by EVs, is transforming the space. Investing in battery technology holds appeal to a wide range of investors, from those focused on green energy to those looking for different growth themes to incorporate in a portfolio. Kanish Chugh, Head of Distribution, spoke to Corentin Baschet, Head of Market Analysis for Clean Horizon, about the changing battery technology landscape. Clean Horizon is a consulting company dedicated to energy storage and is the data provider for Solactive, the index provider for ETFS Battery Tech and Lithium ETF (ASX code: ACDC). The basics of batteries As an older technology, battery technology is both familiar and unfamiliar. Traditional batteries used a lead-carbon system, while the form favoured for grid and EV use today is lithium-ion batteries which are typically safer, more efficient and cost-effective. “A container battery storage system is fairly simple. It looks a lot like a server, there are racks and there are modules within those racks of energy storage. Then you need the inverters, transformers, you need all the integration of the work, the construction work,” Mr Baschet says. In terms of lithium-ion batteries, he says, “lithium is the ion that exchanges from the cathode to the anode, so it’s the key to the system. It enables the currents to flow.” Despite the name, lithium is not the major component in lithium-ion batteries, representing only 2% of the mass of the battery ion cell, other important materials include nickel, manganese and cobalt. The primary demand at this stage is from the EV industry but demand for grid storage is anticipated to rise the greater the movement towards renewable energy. “More than 50% of the world’s production of lithium goes to the EV industries. There’s one World Bank study that has looked at how much material we would need if we were to decarbonise the grid and transport entirely by 2050 and their conclusion was that we will need 85% of the resources of lithium worldwide,” says Mr Baschet. Mr Baschet views the key to growth in battery technology will be increasing penetration of renewable energy but until then, most innovation in this sphere is coming from the EV industry with a push to make battery technology cheaper with increased storage. The growing EV industry The idea that EVs are driving battery technology innovation and growth may come as a surprise in the Australian market. Australians have been slower to move on EVs due to low government support, costs (including the luxury car tax), access to power docking stations nationwide and misconceptions around travel range1. Globally though, EVs are increasingly popular. Some countries, for example, Germany and the UK, even offer incentives and subsidies for those who purchase electric vehicles2. BloombergNEF predicts sales to rapidly increase from 2.7% of new cars sold representing 1.7 million cars in 2020, to over half of all passenger vehicles sold by 2040 representing 54 million cars3. China is likely to represent the lion’s share of sales and development of electric vehicles, even as it has been forced to slow down activity during the COVID-19 pandemic. More than 55% of all electric cars sold in the world are Chinese sales4 and the market there has been supported by government subsidies and regulations around certain percentages of automotive sales required to be electric. Chinese company BYD, a manufacturer of vehicles and battery technology, is responsible for the greatest portion of electric vehicles sold in the world5. More than the big names Tesla is typically front of mind when investors think of EVs or battery storage but there are many other companies involved in the industry. Mr Baschet views Tesla as an integrator of components, similar to companies like Sumitomo, Brookfield, General Electric, Lockhead Martin and Toshiba. Investors should be aware of the complete supply chain underlying battery technology, from mining to manufacturers, rather than just looking at the end integrating company. For example, he says, “Tesla also relies a lot on LG Chem, CATL and Panasonic.” According to Mr Baschet, some established companies may find alternative business opportunities via battery technology. “There's a couple of vehicle manufacturers which are interested in energy storage and will have future business doing energy storage just because they buy so many batteries, they might use them for a second life, for instance. So, taking the batteries from vehicles to put them into a container system and provide services,” he says. At the end of the day, battery technology encompasses a wide range of companies and even industries. Investors can look at anything from components such as lithium, battery manufacturers or companies with more diversified capabilities not purely restricted to battery technology either directly, or via managed options such as ETFs. Interested in learning more about investing in battery technology? Contact us to find out more about ETFS Battery Tech & Lithium ETF (ASX code: ACDC) 1 https://www.whichcar.com.au/car-news/australians-want-electric-vehicles 2 https://www.drivingelectric.com/news/1818/electric-car-incentives-and-subsidies-ps6000-uk-scrappage-scheme-possible 3 https://about.bnef.com/electric-vehicle-outlook/ 4 https://www.marketwatch.com/story/china-not-tesla-will-drive-the-electric-car-revolution-2019-05-14 5 https://www.bloomberg.com/opinion/articles/2019-09-20/electric-vehicle-market-so-far-belongs-to-china
Oct 07, 2020
In uncertain times, investors often question the best approach for their portfolio. The debate between investing in growth or value often comes up during uncertainty, particularly when certain aspects of growth investing may directly benefit from market volatility. Kanish Chugh, Head of Distribution for ETF Securities, spoke to Tom Schubert, Managing Partner and Portfolio Manager and Alex Cathcart, Portfolio Manager, from Drummond Capital Partners, about growth and value investing in the current uncertain market environment. The market outlook Drummond Capital Partners have developed three potential scenarios for the future, each dependent on whether certain events occur. Mr Cathcart says, “It has a lot to do with the interaction between fiscal and monetary policy, and what that means for the path of debt, both household and government, and ultimately what it means for inflation.” Scenario 1 Future scenario one is high inflation and is based on the potential of a Democratic win in the US, including the Presidency and the Senate. In this scenario, Mr Cathcart suggests that there would likely be policies enacting trillions in government spending, financed by the US Federal Reserve. Eventually, this activity would lead to higher inflation. Scenario 2 Scenario two is the middle ground where effectively markets act as they’ve acted for the past 10 years. “In that world, interest rates remain very low…You’re likely to see fiscal austerity coming out of that, which is quite damaging to growth,” says Mr Cathcart. Scenario 3 The third scenario assumes low inflation in an environment Mr Cathcart compares to the economic situation of Japan. He says, “most big developed economies have aging and old populations. Interest rates just continue to fall. Growth is low…You can have more deeply negative short-term rates than we currently do. In that world, it’s a world of low growth deflation.” Of the three scenarios, Mr Cathcart says the chance of the first has become slightly elevated nearing the US Federal Election. You can read more insights on this here. Investing for the scenarios? Many investors tend to fall into either of two camps – value or growth. “Value investors are essentially seeking to buy stocks which are undervalued relative to their intrinsic value today and they’ll use valuation metrics, such as price to earnings or price to book ratios…[Growth investors] tend to focus more on revenue and earnings growth and are generally looking for industries with larger addressable markets, you know, long runways for growth. They’re often prepared to pay higher valuations today for that long-term earnings potential,” says Mr Schubert. Given the evaluation metrics used, certain sectors tend to dominate certain styles. For example, value investments tend to be dominated by financials and industrials while technology and communications generally fall more under growth investments. For example, investments like ETFS Morningstar Global Technology ETF (ASX Code: TECH) or ETFS FANG+ ETF (ASX Code: FANG) generally fall under growth investments. Which style performs better is often influenced by where we are in the economic cycle. “Value tends to outperform when economic growth is accelerating. Growth tends to outperform when you have a period, such as the last decade, of low economic growth, low inflation and therefore low interest rates,” Mr Schubert says. “Our research suggests that the most common macro factor, relating to the relative performance between growth and value, is interest rates,” he says. Drummond Capital Partners tend to be style agnostic, pivoting their portfolios based on their current views, conscious of the macro environment and the potential for different scenarios, each with different interest rate levels. Mr Schubert says, “we have held a long-term overweight position to global growth equities and it’s really benefitted our portfolios. We did reduce this slightly… we're sort of sitting back with that cash we took off the table, and really watching, as Alex had started to talk about in terms of the U.S. election, what that potentially means from the fiscal standpoint, and if indeed we should be making the portfolio slightly more style neutral or indeed, you know, pivoting to value.” Blending investments Drummond Capital Partners uses a combination of passive and active investments in their portfolios, viewing it as offering a higher hurdle point for active investments and allowing them to back their views with solid investments on the passive side. Interested in understanding more about this? Visit our Partner Series video and summary on Active investing with passive funds. “Passive is not a bad way for us to express some of our tactical views that tend to be cheaper and more liquid in terms of access… we combine that with some good core long term growth managers and sector-specific managers, particularly in fixed income,” says Mr Schubert. ETF Securities offer a range of ETFs across asset classes, regions, sectors and themes for your investment portfolio. Find out more about our products, here. Important Information ETFS Management (Australia) Ltd (AFSL 466778) (“ETFS”), is the responsible entity and issuer of units in the ETFS Morningstar Global Technology ETF (ASX: TECH) ARSN: 616 755 652 and ETFS FANG+ ETF (ASX code: FANG) ARSN: 628 036 625. The PDS contains all of the details of the offer of units in the Funds. Any investment decision should only be considered after reading the relevant offer document in full. Source ICE Data Indices, LLC, is used with permission. “NYSE® FANG+TM” is a service/trademark of ICE Data Indices, LLC or its affiliates and has been licensed, along with theNYSE® FANG+TM Index (“Index”) for use by ETFS Management (AUS) Limited in connection with ETFS FANG+ ETF (FANG) (the “Product”). Neither ETFS Management (AUS) Limited, ETFS FANG+ ETF (the “Trust”) nor the Product, as applicable, is sponsored, endorsed, sold or promoted by ICE Data Indices, LLC, its affiliates or its Third Party Suppliers (“ICE Data and its Suppliers”). ICE Data and its Suppliers make no representations or warranties regarding the advisability of investing in securities generally, in the Product particularly, the Trust or the ability of the Index to track general market performance. Past performance of an Index is not an indicator of or a guarantee of future results. ICE DATA AND ITS SUPPLIERS DISCLAIM ANY AND ALL WARRANTIES AND REPRESENTATIONS, EXPRESS AND/OR IMPLIED, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, INCLUDING THE INDICES, INDEX DATA AND ANY INFORMATION INCLUDED IN, RELATED TO, OR DERIVED THEREFROM (“INDEX DATA”). ICE DATA AND ITS SUPPLIERS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY WITH RESPECT TO THE ADEQUACY, ACCURACY, TIMELINESS OR COMPLETENESS OF THE INDICES AND THE INDEX DATA, WHICH ARE PROVIDED ON AN “AS IS” BASIS AND YOUR USE IS AT YOUR OWN RISK. The Morningstar® Developed Markets Technology Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the ETFS Morningstar Global Technology ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Developed Markets Technology Moat Focus IndexSM is a service mark of Morningstar, Inc.
Sep 23, 2020
How Morningstar identify the top tech stocks The year 2020 is one that will stand out in the history books, most notably for the COVID Pandemic but also the seismic shift in the geopolitical landscape. On the local and global investment scene, technology stocks have been front and centre. In our universe, arguably the purest global tech play available to Aussie retail investors is the ETFS Morningstar Global Technology ETF, (ASX code: TECH). TECH is up 15.6% this year as at 31st of August 2020, and provides exposure to 50 global technology names, tracking the Morningstar Developed Markets Technology Moat Focus Index. Talking Tech Brian Colello, Director of Technology, Equity Research for Morningstar Research Services recently joined us for a discussion on the technology sector in today’s pandemic ravaged world and the outlook for global technology equity stocks. Brian highlighted the current investment climate with a spotlight on the winners and losers in the tech sector. He noted “There have been strong tailwinds within tech for the past few years and COVID-19 has only strengthened those tailwinds. Whether it's cloud computing, artificial intelligence, the beginning of 5G networks, there are some great things going on in tech that should lead to strong growth. But with more remote workers, companies have become even more reliant on technology.” Demand for tech stocks is coming from multiple sources, said Brian. “There's a lot of COVID related stimulus money in the US, and we believe some of that capital may be going into the tech stocks.”. Brian also notes, “we're obviously in a very low interest rate environment. The US has cut rates down to effectively zero, so bonds might be relatively less attractive as well and then finally, we certainly have sectors that have been hit hard by COVID.” A new safehaven? There’s a re-rating of tech to ‘safety’ according to Brian. He said “We would argue that tech represents relative safety in these times. Tech has never really been thought of as safety, but we are not cancelling our Microsoft Office subscriptions or our Salesforce subscriptions among salespeople because of COVID, so there's still some resiliency there.” Defining ‘Tech’ in 2020 Brian also addressed the vexed question of what a tech stock actually is, and where some of the FAANGs like Facebook, Amazon and others sit. “We could talk to a hundred different investors and they could define tech via a hundred different ways. So the way we model itis similar to the GICs codes and there've been some shifts in coverage of names like Google and Facebook that are now considered media names or advertising names.” According to Brian, even though Amazon is considered a consumer stock, obviously it has a hefty tech component. “The way we focus on tech and sort of the expertise of our group is in semiconductors software, hardware, networking, as some of these other names are within other teams, but we recognize there's overlap. We obviously keep an eye on them but that's how we classify this group when we're looking at tech stocks.” So what are the key trends in technology? Cloud computing is probably the biggest trend - renting out IT capacity in the cloud rather than building it yourself. 'Software as a Service’ continues to grow and be a bigger piece of the pie as companies continue to move to the cloud model and a subscription model of accessing the latest and greatest software at all times, that is secure. 5G is another one for technology. The companies that enable that 5G technology, the semiconductors, the equipment are certainly favourable trends in technology. Artificial intelligence - It's being done by the leaders in order to simplify and streamline, whether it's apps, software operations, or whether it's to glean insights from big data. Then ‘The Internet of Things’ is something we continue to hear more about - making devices smarter, more sensors, more processors, connectivity. How to find value in Tech “We would say today that technology is overvalued,” noted Brian. He said: “The median technology stock that we cover at Morningstar has a price to fair value ratio of 1.12, so 12% overvalued. At the height, maybe a few weeks back, it was as high as 24% of our value. This is the highest peak we've seen since 2007, so not only is the sector expensive, but it's the most expensive we've seen in at least 13 years. Some of our fair value estimates are even higher than they were two or three months ago yet it looks like the market is even more optimistic than we are expecting.” The ETFS Morningstar Global Technology ETF (ASX code: TECH) tracks the Morningstar Developed Markets Technology Moat Focus Index. It's more than just a tech sector play and combats some of the valuation concerns across the tech sector. Morningstar applies a fair value screen to its analysis of companies in the Index, setting it apart from many others, said Brian. “When we analyse companies, we provide a fair value estimate, it's the intrinsic value of what we think of businesses worth at any point in time. We look for companies with a price to fair value discount where the stock price is significantly below our fair value estimate. It's important that we identify firms that trade with a decent margin of safety. Microsoft is a name we think is fairly valued, so compared to our fair value estimate, we think the stock price is about right today.” The second defining feature of the Index is Morningstar’s Moat methodology. “A moat is the sustainable competitive advantage that companies possess and even though tech is a fast moving sector some companies have them. If you think about the competitive advantages of firms like Microsoft and Amazon Web Services – these are some of the strongest moats we probably see in the world to the point that there's antitrust concerns today.” Investors wanting to capture the growth of global tech can use products such as the ETFS Morningstar Global Technology ETF to intelligently access a diverse basket of global tech stocks with an economic moat over competitors. Important Information The Morningstar® Developed Markets Technology Moat Focus Index was created and is maintained by Morningstar, Inc and is licensed to ETFS Management (AUS) Limited by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), a subsidiary of Morningstar, Inc. Neither Morningstar, Inc. nor Morningstar Australasia Pty Ltd. sponsors, endorses, issues, sells, or promotes ETFS Morningstar Global Technology ETF, and neither Morningstar entity bears any liability with respect to that ETF or any security. Morningstar® is a registered trade mark of Morningstar, Inc. Morningstar® Developed Markets Technology Moat Focus Index is a trade mark of Morningstar, Inc.