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Weekly ETF Monitor for week ending 5 July 2019

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Jul 09, 2019

This week's highlights The Australian share market rallied last week following the RBA’s 25 basis point rate cut. Property ETFs responded strongly, with MVA, VAP and SLF all amongst the top performers. Domestic equity income funds including DIV and EINC also performed strongly. The U.S. dollar gained ground following better than anticipated employment numbers on Friday, tempering expectations of a Fed rate cut this month. Currency funds AUDS, POU and EEU were amongst the worst performing ETFs for the week. ETFS Physical Gold (GOLD) pulled-back from its recent peak falling 0.8% for the week, while gold miners (MNRS) fell 1.0%. Crude oil (OOO) dipped 1.6% on global demand concerns. Total flows into domestically domiciled ETFs were $200m, while outflows totalled $40m. The biggest inflows were into defensive assets such as cash and fixed income/hybrid funds (AAA, IAF, HBRD and BILL) and gold (GOLD). The bulk of outflows were from STW. STW and AAA were the most traded fund last week, while VAP and MGE saw above average volumes. ETFS Physical Palladium (ETPMPD) returned 4.0% for the week and is up 75.2% over the past 12 months. Palladium has all-but recovered from its recent dip and could test all-time highs close to US$1,600 per ounce in the coming weeks.

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The Opportunity of India

Jul 09, 2019

Product in focus: ETFS Reliance India Nifty 50 ETF (ASX Code: NDIA) Key Points The Indian economy is primed to benefit from the structural reforms of the Modi government. Domestic consumption is powering 60% of Indian GDP. The average age in India is just 28 supplying a young and agile workforce that are increasingly connected. India is the world’s largest democracy, the sixth largest economy and has a population of 1.3 billion, 54 times the number of people in Australia for approximately the same land size. The nation is undergoing a rapid transformation that was truly initiated by the liberalisation of the economy beginning in 1991. Structural changes to the economy have been brought about in recent years by the Modi government aiding the significant growth seen today. The fundamental driver of this growth is the increase in domestic consumption throughout the nation. Structural Reform Key reforms initiated by Modi have begun the process of formalising India’s economy and created a better environment for business. This has been reflected in the World Bank’s ease of doing business ranking, India is now ranked 77th in the world and significantly, this represents an increase in 53 positions over two years. Contributors to this progress include the introduction of GST in mid-2017 which centralised 17 indirect taxes that were previously levied. 2017 also saw the sovereign credit rating upgraded one level by Moody’s, the first movement in this in 14 years. The evolution of the economy can be seen through the fundamental shift from the previous agrarian focus to the more service-based economy we see today. Consumption A 2019 report by the World Economic Forum identified domestic consumption as the key driver of India’s economy today, powering 60% of GDP. The report outlines five significant contributors to India’s growing consumption: 1. Income growth India is undergoing a transformation in wealth, it is projected that 25 million households will be lifted out of poverty by 2030, reducing the percentage of households in poverty from 15% today to less than 5%. This is introducing a huge expansion of the middle class and uptick in consumption of everyday items. 2. Urbanisation 40% of Indian’s will live in urban areas by 2030 as there is a steady migration from rural regions to cities and increased population density urbanises previously small towns. This movement is compounding the need for core infrastructure developments to cope with additional population pressures. 3. Demographic change India has a median age of just 28 years. This young and, comparatively, highly educated work force will remain young through to 2030 with an expected median age of 31 years. Compare this to the expected median age in Australia of 40 years and China at 42 years. (1) 4. Technology and innovation Indian’s have embraced the new digital age, and in many cases, they have leap-frogged many of those technologies that emerged during the dot-com bubble. 80% of Indian’s use their mobile as the primary platform for accessing the internet with the desktop computer bypassed completely. This has created a highly engaged and agile market who are adopting many of the new technologies the share economy has to offer. Rideshare company Ola, a strong rival to Uber, was valued at $6.2 billion in May 2019 and has set a goal to bring one million electric vehicles onto the roads by 2021. (2) Projections suggest there will be 1.1 billion internet users in India by 2030, with each representing further opportunities to extend consumption and engage with the new service-based economy. 5. Changing consumer attitudes As the Indian population has become wealthier and more connected, the core attitudes of consumers are also changing. The growing middle class has led to the emergence of sectors in the market that were previously very small, including dining out, personal hygiene, organic food, health and fitness. Opportunity Awaits The Nifty50 Index is primed to benefit from the structural reforms currently happening in India. Financials make up almost 40% of the Nifty50 and these companies will arguably benefit the most from recent changes. With the policy of demonetisation and the introduction of GST boosting their performance. The second biggest overall sector in the index is the consumer sector, making up about 17% of the index, which will also benefit from India’s growing middle class, household consumption and urbanisation. India’s overall economic growth has been driven through domestic consumption and the Nifty50 is no different, with the index constituents generating a significant portion of their revenue onshore, despite their large cap nature. As global volatility increases with the threat of trade wars and political uncertainty, India can rely on its domestic consumption to achieve the 7.5% forecast growth in 2020 (IMF, April 2019). 1 https://www.statista.com/statistics/260493/median-age-of-the-population-in-australia/ 2 https://www.financialexpress.com/industry/sme/indias-2nd-most-valuable-startup-ola-valuation-to-hit-6-2-billion-new-funding-proposal-by-hyundai-kia-motors-show/1565464/

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The Case for Gold Keeps Growing

Jul 09, 2019

Published: 9th July 2019 Product in Focus: ETFS Physical Gold (ASX Code: Gold) Key Points Gold has been on a run in 2019 reaching a new all time high in AUD terms of over A$2000/ounce. Gold price is influenced by economic uncertainty and momentum Demand is high, driven by central bank and ETF purchasing Gold has been on a great run in 2019. US$ spot gold is up 9.1% since the start of the year and has recently been trading above US $1,400 for the first time since 2013 (as at 8th July 2019). In Australian dollar terms gold is hitting new all-time highs above A$2,000 an ounce. Fuelled by equity market volatility in late 2018 and recent heightened expectations of easing monetary policy, gold has performed precisely as would have been predicated by anyone anticipating the broader macro forces at work over the past year. Equity market volatility in early 2018 triggered a rally, which subsided as markets regrouped and set sail for new highs in the third quarter. Volatility returned the fourth quarter of 2018, driving gold higher again. All of this occurred with the backdrop of an abrupt shift in monetary policy from major central banks. To put gold’s price activity into context, it is worth looking at the historic drivers of the gold price. Research by the World Gold Council highlights the four broad categories of factors that influence the price of gold; This article looks at these four key factors in the context of the current market from a global perspective. Factor 1: Economic Expansion Despite much talk about the uncorrelated and counter-cyclical aspects of gold, like most assets, demand for gold is at least somewhat driven by the overall level activity and wealth in the global economy. Where savings and investment levels are high, demand for gold is high. Recent years have seen growing demand for gold from both India and China as levels of disposable wealth have grown. These two countries now account for more than 50% of global demand for gold. Conversely, a slowdown in the technology sector in late 2018 saw industrial demand fall by 3% in Q1 2019. While a broader economic slowdown seems to be in progress, the diversity of demand for gold and its traditional role as a strategic investment asset makes it unlikely that a reduction in economic activity will have a significant negative price impact on gold in the short-term. Factor 2: Risk and Uncertainty As an investment asset gold is commonly deployed as a portfolio diversifier, inflation hedge and quasi-insurance policy. Gold has shown persistently low levels of correlation with stocks and bonds over the long term, which means that the addition of gold to a portfolio is often able to improve risk-adjusted returns by adding diversification. Figure 3, below, shows the impact of adding gold to a typical balanced portfolio invested across Australian and international equities and fixed income (as represented by Vanguard’s LifeStrategy Balanced Fund). The conclusion here is that over the long-run a relatively small allocation to gold in a portfolio can have a consistent impact on the risk/return profile of the portfolio. In addition, gold can also have a substantial impact when other asset returns are stressed. This is evidenced in Figure 3(b) by the lower drawdowns, or losses experienced during the largest negative events. This leads us to gold’s commonly cited role as an “event risk” hedge. When major, unexpected events occur gold has, time and again, had a better outcome than equity markets. Figure 4, below, shows how gold fared versus the S&P 500 and ASX 200 through a selection of major financial events over the past four decades. When negative market events occur, gold’s correlation with mainstream asset classes tends to reduce and even become negative. This is in stark contrast to many other “alternative” assets, such as hedge fund strategies. During the global financial crisis, these were seen to be highly correlated to equity markets as investors simultaneously rushed to the exit of anything but the safest stores of value. Not only is gold highly liquid, its other important feature is that it has no credit risk. Unlike other asset classes, during times of financial stress when risk premiums are raised correlations between other assets rise as investors simultaneously look to sell, while gold often moves the other way on safe-haven buying. While such major events are unpredictable by nature, there is a growing case to be made that equity market valuations are currently stretched and that the volatility seen in early and late 2018 could well return in the near-term. Even if the monetary authorities are ahead of the curve and manage to engineer a soft landing, late-phase bull-markets are synonymous with bouts of volatility. As with any insurance policy, premiums are paid in the hope you never need to make a claim. Factor 3: Opportunity Cost The most common argument made against investing in gold is that gold has no intrinsic value because it produces no income and in fact produces negative income if you account for storage and security costs. This is certainly true in a literal sense. As has already been demonstrated, however, this should not detract from the role gold can play in a portfolio and the potential value it adds. The opportunity cost associated with holding gold is driven by the income and gains forgone by investing in gold over other asset classes. This is clearest in relation to bonds - when interest rates are high the relative cost of owning gold is high. Bonds may provide the necessary diversification, while also providing attractive levels of income. When yields are low, however, that cost of owning gold is reduced, making gold a more attractive play. In cases where yields are negative, as we currently see across Japan and the eurozone, gold effectively provides a positive yield. In the current market, not only are interest rates at the low end of the historic range, but monetary authorities, most importantly in the U.S., but also in Australia and Europe, have recently shifted from a normalisation/tightening bias, to a stimulatory/easing bias. Figure 5, below, demonstrates the very close relationship between gold and the U.S. 2-year Treasury yield over the past 18 months. Furthermore, over the past two easing cycles in the U.S. between 2001-03 and between 2007-08 gold appreciated by 31% and 17% respectively. Research by the World Gold Council also suggests that not only do lower interest rates raise demand for gold, but that interest rates have a greater impact on gold in periods where there is a shift in stance, which is exactly what we have seen over the past few months. Markets are now pricing a 100% probability of a Fed cut at the end of July. The likelihood of this was less than 20% as recently as late-May. Factor 4: Momentum Like most assets, gold is susceptible to trends and changes in momentum as it moves in and out of favour and the current trend is overwhelmingly positive. A key area of investment demand is from exchange traded funds (ETFs). Figure 6 shows that global ETF holdings have been steadily rising since early 2016. There are now over 74 million troy ounces of gold supporting physically-backed ETFs, which provide investors with access to gold on most global stock exchanges. ETF users range from larger institutional to small retail investors. Central bank demand is also growing and has been doing so since 2010. Net purchases are at historic highs and diversified across a wide range of nations. According to the World Gold Council 9 central banks added more than a tonne of gold to their reserves in Q1 2019. Conclusion In summary, gold has picked-up a strong tail-wind in recent months. Demand for gold continues to grow on multiple fronts. The case for using gold as a portfolio diversifier is also becoming clearer as interest rates decline and future growth prospects of global economies are questioned. For investors who are concerned with the risk of drastic, unexpected events it is hard to go past the track record of gold in helping to reduce losses in such scenarios. How to invest? Investors looking to add gold exposure to their portfolios can do so via ETFS Physical Gold (ASX: GOLD). GOLD is the oldest and largest gold ETF traded on the ASX. It is fully-backed by physical gold bullion vaulted on behalf of investors in the fund. GOLD charges a management fee of 0.40% per annum.

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Weekly ETF Monitor for week ending 28 June 2019

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Jul 02, 2019

This week's highlights Global equity markets softened last week ahead of the resumption of U.S.-China trade talks. Resources and commodity stocks outperformed last week as safe-haven assets gained favour. Gold reached new 6-year highs moving above US$1,400 per ounce, while OZR, QAU and MNRS were amongst the top performers. The worst performers over the week were actively managed products MGE, MHG and MICH. With real estate and infrastructure products generally having a downward trend. Total flows into domestically domiciled ETFs were $342m, while outflows totalled $17m for the week. The biggest inflows were into broad-based domestic equity funds (STW, A200 and MVW) as well as cash (AAA and BILL) and a range of equity and fixed income funds. ETFS Physical Gold (GOLD) saw A$24.5m of inflows for the month of June. STW was the most traded fund last week, while VAF and GOLD saw above average volumes. ETFS Physical Gold (GOLD) and ETFS Physical Precious Metals Basket (ETPMPM) both hit since inception highs last week.

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Weekly ETF Monitor for week ending 21 June 2019

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Jun 25, 2019

This week's highlights Risk assets rallied last week on rate-cut expectations in the U.S. and eurozone. Resources and commodity stocks outperformed. Gold mining ETFs (GDX and MNRS) were amongst the top performers for the week, while China and Asia-Pac ETFs performed strongly across the board. ETFS S&P Biotech ETF (CURE) returned 6.4% for the week. Gold rallied above US$1,400 for the first time since 2013 and hit new all-time highs in Australian dollar terms. GOLD returned 2.8% for the week. Oil (OOO) returned 8.8% for the week following the Iran drone attack. Total flows into domestically domiciled ETFs were $182m, while outflows totalled $71m. The biggest inflows were into Russell Australia Responsible Investment ETF (RARI), broad based Australian equity funds (IOZ, A200 and STW), a range of domestic fixed income/hybrid funds (HBRD and AAA) and GOLD. STW and AAA were the most traded funds last week, while GOLD and GEAR saw above average volumes. ETF Securities launched Australia’s first India ETF on Friday; ETFS Reliance India Nifty 50 ETF (NDIA), which tracks the Nifty50, India’s flagship benchmark index.

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The changing face of India

Jun 21, 2019

Product In Focus: ETFS Reliance India Nifty 50 ETF (NDIA) Key Points India has the world’s second largest population and is soon expected to surpass China The median age is just 28, this young demographic is powering significant growth The World Bank has estimated that India’s 2019/20 GDP growth will be 7.5% ETF Securities have launched Australia’s first ETF giving access to Indian equities (ASX Code: NDIA) The colour and chaos that is India has always captivated the imagination like no other country. From ancient agrarian beginnings, shaped by five thousand years of political, cultural and religious diversity, India is now emerging as an economic powerhouse. With a population of almost 1.3 billion people and one of the fastest growing economies in the world, many commentators are hailing India as ‘the new China’. Australian investors now have the opportunity to access this vibrant and rapidly growing economy with the launch by ETF Securities of the first exchange traded fund offering exposure to Indian stocks. What is propelling the India growth story? It is difficult to ignore the sheer scale of India. Currently the world’s second most populous nation, India is expected to claim the number one spot from China within the next decade. By 2025, it is estimated that one fifth of the world’s working age population will be Indian. And, with a median age of just 28 years, India’s young demographic is expected to power the country’s economy into the next decade. The potential is clearly shown by the pace at which Indians have embraced digital technology. With a take up rate second only to Indonesia, the number of Indian internet users is expected to hit 1.1 billion by 2030. Already, Indians spend more time on social media than their counterparts in China and the United States. The World Bank recently estimated that India’s GDP would grow by 7.5% in 2019/20, and continue this pattern in 2021 and 2022, pointing to the increasing resilience of its economy. Consumption among India’s younger demographic is only part of the story. The growth upswing is also being driven by increased foreign investment, which has been encouraged by structural reforms in the taxation and business sectors. Reserve Bank of India figures show that investment activity accelerated by 12.2% in 2018/19 compared to 7.6% in the previous year. Significantly, much of the investment over the past two decades has found its way not into industry but into a booming services sector. Social reforms and policy initiatives in infrastructure development, health and rural transformation have also played a big part, shifting India’s economy from one characterised by overwhelmingly high levels of poverty to one with an increasing degree of self-sufficiency. The changing face of India is reflected in the shrinking number of its citizens living in extreme poverty, which was slashed from 46% to an estimated 13.4% in the two decades leading up to 2015, according to the World Bank. In the past two decades, per capita income in India has risen fivefold, passenger car sales by 5.5 times and the number of inbound tourists by 8 times. The Asian Development Bank in its latest Asian Development Outlook said that it, too, expected the Indian economy to outperform, although its forecasts were slightly less bullish than the World Bank at 7.2% for FY2019/20. “India has a golden opportunity to cement recent economic gains by becoming more integrated in global value chains. The country’s young workforce, an improving business climate and a renewed focus on export expansion all support this,” the ADB said. “An increase in utilisation of production capacity by firms, along with falling levels of stressed assets held by banks and easing of credit restrictions on certain banks, is expected to help investment grow at a healthy rate.” Challenges ahead Although India’s economic development in recent years has outstripped that of many other emerging markets, the country still faces some challenges to ensure progress extends to all demographic and geographic areas. These key challenges include skill development and employment for the future workforce, creating a healthy and sustainable population, and lowering barriers for socio-economic inclusion of India’s rural population. Some commentators predict that India needs annual growth of 8% to create enough jobs for the more than 12 million young Indians entering the workforce each year. However, the unevenness of the growth in the economy has meant that growth in jobs has not kept pace. A recent McKinsey Global Institute study concluded that the digitisation of India’s economy could create 65 million jobs by 2025 but 40 million workers would need to be retrained to do them. India is at a tipping point and the time is ripe for key stakeholders within the public and private sector to come together to address these issues head on. Doing so will unshackle the potential of India’s youthful and technologically connected population and allow India to be a model for other fast-growing consumers markets. Indian election The recent return to power of the Bharatiya Janata Party (BJP), headed by Narendra Modi has been viewed as a positive, although the government faces several challenges to maintain the country’s economic momentum. Modi has been praised for his swiftness in dealing with geopolitical issues and implementing key supply-side reforms. Some commentators, however, have been critical that he has not delivered on economic promises to create more jobs, particularly in rural areas, where two thirds of the population is based. This will be a key target for his government over his second five year term. First ETF for India (NDIA) ETF Securities has teamed with Reliance Nippon Life Asset Management, one of India’s largest asset managers, for the launch of its NDIA ETF. Reliance has a 23 year track record in India and has some $USD 61 billion under management. NDIA will invest in a basket of stocks based on the Nifty50 Index – which comprises the 50 biggest listed companies listed on the National Stock Exchange (NSE), including HDFC Bank, Reliance Industries, Housing Development Finance Corporation, Infosys, ITC, ICICI Bank and Hindustan Unilever. It accounts for 13 sectors representing about 66.8% of the free float market capitalisation of the stocks listed on the NSE. The Nifty50 is up 13.6% over the past year and 16.3% over five years. Until now, India has been difficult for offshore investors to access due to the country’s strict foreign investment rules. Although there are a few unlisted “active” funds that invest in India, ETF Securities’ NDIA is the first vehicle for passive investment available to Australian investors. ETF Securities is Australia’s only independent ETF provider. Founded by philanthropist Graham Tuckwell, the group has more than A$1 billion in funds under management, across sectors as diverse as robotics, biotechnology, infrastructure and commodities.

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