Key global market trends – stock rebound!
After two months of consolidation, global equities powered ahead in November, reflecting positive COVID-19 vaccine news and a seemingly clear winner of the U.S. Presidential election. The gains came despite rising COVID-19 cases in both Europe and the United States and the re-imposition of some social distancing restrictions.
Reflecting the risk-on sentiment, the $US and gold prices retreated while oil prices strengthened. Overall global bond yields, however, remained fairly subdued.
As seen in the chart set below, the rebound in global equities has reaffirmed the uptrend that has been evident since earlier this year. The trend in both bond yields and the $US remains downward, though both have broadly consolidated in recent months. Gold prices are still in an uptrend, through this appears at risk of breaking if much further price weakness develops. Oil prices, meanwhile, are trying to push higher following sharp declines earlier this year.
Global equity fundamentals – interest rates remain low and earnings are turning up
Last month’s rebound in equities reflected both a rebound in PE valuations and a further lift in forward earnings. Fundamentally, the equity outlook remains encouraging – provided bond yields stay low and the recent stabilisation in earnings expectations persists. Indeed, while the PE ratio at just under 20 times forward earnings appears elevated by historical standards, valuations are less extreme when considered against the still very low level of bond yields. Importantly, moreover, earnings expectations remain consistent with further gains in forward earnings over the coming year.
Note: ‘forward earnings’ is a weighted average of current and subsequent calendar year estimates – with the weight on next year’s earnings rising as it gets closer. In essence, for example, forward earnings in June 2020 reflected a weight of 50% to CY’20 and CY’21 earnings respectively. In December 2020, forward earnings will place a 100% weight on CY’21 earnings (wherever analyst expectations are at the time).
Key global equity themes – revenge of the ‘value’ sectors
Un-loved value parts of the global equity market – such as energy, financials and non-U.S. developed markets – broadly outperformed for the second month in a row, though unlike in the previous month, growth stocks also delivered reasonably good gains in November. By region, the U.S. and emerging markets retain the strongest performance trends, with the strongest sectors being technology and consumer discretionary and the strongest factors momentum, growth and quality. Australia’s S&P/ASX 200 Index produced a solid return of 10.2%, though this was still slightly less than the 11.5% return from the MSCI-All Country World Index in local currency terms.
Tables ordered by 6/12 month return performance for each region, sector and factor respectively – on a local currency basis. Past performance is not indicative of future performance. You cannot invest directly in an index.
As seen in the table below, these trends are reflected in the performance of BetaShares’ thematic global and Australian equity ETFs.
Within Australian equities, financials (QFN) and the fundamentally weighted equity index (QOZ) delivered the strongest returns last month while technology (ATEC) and small caps (SMLL) delivered the weakest returns (albeit still pretty good). Technology and small caps, however, retain the strongest performance trends.
Among the global currency-hedged funds***, energy producers FUEL enjoyed a blowout month with a 26% price return, followed by the long beleaguered financial sector (BNKS) with a 19% return. The drop in gold prices, however, led to a further decline in the gold mining sector (MNRS). The tech heavy NASDAQ-100 (HNDQ) and global quality (HQLT), nonetheless, delivered good returns and retain the strongest performance trends.
A firmer $A led to more subdued returns among unhedged global equity funds, with UK stocks (F100) enjoying the strongest return. Tech-related exposures HACK and RBTZ delivered the next-best returns while the strongly performing Asian (ex-Japan) technology fund (ASIA) had the smallest return. Emerging markets (EMMG), along with this suite of tech-related exposures, however, retain the strongest performance trends.
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.
Cash and bonds – government yields drop, credit spreads widen
Overall bond yields remained subdued in November, with a modest lift in government bond yields offset by sharp re-tightening in credit spreads. The overall AusBond Composite Index broadly matched the near-zero cash return in the month, though credit exposures – such as the long duration corporate bond fund (CRED) – delivered a stronger return.
Source: Bloomberg. 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 fund fees and costs.
Low and steady bond yields still favour duration and credit exposures within the fixed-income market given the yield-pick up potential over cash returns.
*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.
***Where both currency-hedged and unhedged global equity funds are available, the analysis focuses only on the currency-hedged fund performance.