Reading time: 4 minutes
Key Global Trends – optimism prevails
Ongoing hopes of a US-China trade deal and signs of stabilisation in the two-year global growth slowdown allowed risk-on investor sentiment to prevail during November – with global equities and bond yields moving higher and gold prices pushing lower. The $US also remained generally firm, given growing signs from the Federal Reserve that it does not plan to cut interest rates further.
Major trends across the four major markets we track above remained unchanged last month, though if risk-on sentiment prevails, it is likely that the trend in global bond yields will soon turn up and that for gold down. Under this scenario, the uptrend in equities would also remain intact though the outlook for the $US would be mixed.
Global Equities – Fundamentals Update
As seen in the chart pack below, the uptrend in global equities so far this year continues to be led by PE valuations rather than earnings, with the latter in turn supported by the decline in bond yields.
That said, the drivers of global equities could be changing as risk-sentiment improves: there has been a very modest rebound in forward earnings in recent months, while bond yields have moved higher. The rebound in equity prices, however, is still outstripping earnings, such that as at end-November, the global forward PE ratio rose further, from 15.3 to 15.8 – compared to a 10-year average of 13.9. Global bond yields edged up to 1.41% from 1.34%, which is still below their 10-year average of 1.94%. As a result, the global equity-to bond yield differential eased down to 4.9% from 5.2%, though remains only moderately below its 10-year average of 5.4%.
Over recent years, the highest month-end PE ratio reached by global equities has been around 16 to 16.5, or around 3% above current levels.
For global equities to move higher in coming months it will be important for global bond yields to remain relatively low and/or the downgrade to earnings growth expectations to level out. As it is, the Bloomberg consensus estimate of analyst 2021 earnings expectations still implies 10% growth in forward earnings over the coming year.
Global Equities Trends
Across BetaShares currency-hedged global equity sector/thematic funds, weaker gold prices saw global gold miners drop back (MNRS), though it remains the strongest relative performing hedged exposure. In second place remains European equities (HEUR), supported by recent weakness in the Euro versus the $US.
Across unhedged global equity sector/thematic funds, the US tech-heavy NASDAQ-100 Index (NDQ) along with global quality (QLTY) performed strongly, helped in part by a 1.9% drop in the $A versus the $US. Our Indian ETF (IIND) lost ground last month, after recent strong gains, causing it to drop back in terms of relative performance ranking. Longstanding solid performers NDQ and QLTY are now the two strongest in terms of unhedged relative performance.
Australian Equity Trends
Despite weakness among financial stocks, the S&P/ASX 200 posted a good performance in November, reflecting strength across a range of other sectors such as mining, health care, technology, energy and telecommunications. An improving global growth outlook, weaker $A and very low local interest rates continue to support local stocks – while the financials (i.e. banks) remain plagued by margin squeeze due to lower local interest rates and ongoing reputational damage as more bad practices come to light. Due to ongoing soft economic data and dovish signals from the Reserve Bank, local bond yields dropped last month – bucking the global move higher in yields.
Among BetaShares Australia equity ETP themes, the small/mid-cap focused EX20 ETF and resource-focused QRE ETF performed especially well last month. Along with the defensive yield focused RINC fund, these are the top three relative performers. In general, local companies with good offshore earnings exposure (such as in health care) or high and dependable yields remain in favour. Domestic growth opportunities – as in technology – are also attracting interest despite high valuations and soft local economic growth.
Cash, Bond and Hybrid Trends
Across BetaShares Australian cash, fixed-income and hybrid funds, a drop back in bond yields produced positive returns for our long duration Australian government (AGVT) and corporate bond (CRED) ETFs. Due to the broad downtrend in bond yields, these funds have produced strong returns over the past year.
Smaller gains were evident among floating rate exposures, such as the active hybrids fund (HBRD).
*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.
‘Top BetaShares Global ETP Themes‘ Chart – Source: Bloomberg. On 19 July 2019, HEUR’s benchmark index changed to the S&P Eurozone Exporters Hedged AUD Index from the WisdomTree Europe Hedged Equity Index. The past performance information provided relates to the S&P Eurozone Exporters Hedged AUD Index.
‘Australian ETP Themes’ Chart – Source: Bloomberg. As RINC trading in February 2018, for illustration purposes the performance information for the period prior to the inception date is based on the unlisted Legg Mason Martin Currie Real Income Fund, being a comparable fund managed by Martin Currie Australia using the same strategy for the fund. Performance is shown net of management fees. RINC’s strategy is not constrained by a benchmark and is shown against the S&P/ASX 200 Accumulation Index purely for comparison purposes. Historic performance of the unlisted fund or RINC, is not a reliable indicator of future performance.