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Major global market trends
Reflecting the improving economic outlook, global equities continued to move higher in March, though so too did bond yields. Commodity prices, by contrast, corrected a little, which perhaps reflected a tightening in Chinese credit conditions. Despite the ‘risk-on’ sentiment, the $US continued its recovery so far this year, after weakening through the latter half of last year.
Relative to their 12-month moving average, the trend in equities, bond yields and commodity prices remains to the upside, while – at this stage at least – the trend in the $US is still down.
Looking forward, the outlook for equities remains favourable given rapidly recovering global economic growth and corporate earnings. The major near-term risk is any further untoward rise in bond yields as this could pressure still lofty outright price-to-earnings (PE) valuations. My view is that bond yields should remain relatively contained as any lift in inflation (especially in the U.S.) is likely to be short-lived and won’t change the dovish stance of central banks.
That said, it’s also possible that equities could withstand somewhat higher bond yields given strength in earnings and especially if the equity earnings-to-bond yield gap (which is still above 10 to 20-year average levels) narrowed further instead.
Also of interest is if the $US remains strong along with global equities, which could reflect a growing investor appreciation of the likely relative strength in the U.S. economy this year. I anticipate the $US will gather strength this year, which in turn should contain the $A to around the mid-low US70c range.
Major global equity trends
As seen in the chart set below, the COVID equity recovery so far has favoured non-U.S. themes, such as emerging markets and ‘value’ over ‘growth’. Relative to hedged global equities, Australian stocks have underperformed – though performance has been better against unhedged global equities due to (at least up until recently) strength in the $A. So far at least, however, the underperformance of U.S. stocks has been only modest, and the longer-term relative trend is still pointing up.
Within the ‘value’ part of the global market, one notable development in March was the strong performance in the ‘high yield’ thematic, which has been especially hurt by the weakness in utility and infrastructure stocks during the COVID crisis. This could reflect investors seeking value in areas of the market that have been left behind in the COVID recovery so far.
My base case is that value areas of the global market can continue to outperform over at least the next three to six months, though the ‘reflation/re-opening’ trade should then give way to a reassertion of the pre-COVID relative outperformance of growth sectors such as technology. Overall, the Australian market may also continue to underperform the global benchmark.
BetaShares sector/thematic ETFs
As seen in the table below, the above global trends are reflected in the performance of BetaShares’ thematic global and Australian equity ETFs.
Tables ordered by 6/12 month return performance for each region, sector and factor respectively. Past performance is not indicative of future performance of any index or fund. You cannot invest directly in an index. Index performance doesn’t take into account any fund fees and costs.
Within Australian equities, the strongest performers in the month were our actively managed high yield and real asset funds (EINC and RINC respectively), though financials (QFN) also continued to perform well. Weaker commodity prices hurt resources (QRE) while technology (ATEC) continued to correct lower. That said, ATEC, QRE and QFN were the top-3 performers on an equally-weighted 6/12 month return basis.
Among the global currency-hedged funds***, global banks (BNKS), European (HEUR) and Japanese (HJPN) equities performed especially well in the month – reflecting investor thirst for value – while the tech-exposed NASDAQ-100 (HNDQ) produced positive though somewhat weaker returns. HNDQ, BNKS, and FOOD were the top 3 performers on a 6/12 month basis.
Among the global currency-unhedged funds, our global income fund (INCM) again produced relatively strong returns of 10.8%. The Indian (IIND) and UK (F100) funds also produced solid returns, as did our equally-weighted exposure to America’s S&P 500 Index (QUS).
Further information on the complete range of BetaShares’ exchange traded products can be found here.
*Trend: Outright trend is up if the relevant NAV return index is above its 12-month moving average and the slope of the moving average is positive, and down if the index is below this moving average and the slope of the moving average is negative. No trend is displayed in all other cases. Relative trend is based on the ratio of the relevant return index to its broader Australian or global benchmark index.
**The ranking of performance is based on an equally-weighted average of 6 & 12 month return performance. A short-term ranking is also provided based on equally-weighted 3 and 6 month returns.
***Where both currency-hedged and unhedged global equity funds are available, my analysis focuses only currency-hedged fund performance to abstract from exchange-rate movements.