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Key Global Trends – virus fears
Global equities started the new year on a strong footing, thanks to an easing in global trade tensions. That said, new fears related to the coronavirus have more recently caused a setback, such that overall global equities posted a modest 0.7% decline in January. US equities declined 0.2% while Australia equities remained remarkably resilient, posting a 5% price gain.
Reflecting virus fears, bond yields and the Asia-exposed $A dropped notably, while gold again demonstrated its appeal as a safe haven asset. Oil prices slumped.
As seen in the chart set below, major trends across the four major markets remained unchanged last month, with equities, the $US and gold in an uptrend, and bond yields in a downtrend.
As seen in the chart pack below, the uptrend in global equities over the past year has been led by PE valuations rather than earnings, with the latter in turn supported by the decline in bond yields.
At 16.3 times forward earnings, the global PE ratio is now at the high end of its range of recent years. Given low bond yields, however, the equity-to-bond yield gap (EBYG) (a measure of relative valuations) remains close to its average of recent years. Of some concern, earnings expectations for coming years continue to decline. If these downgrades continue, forward earnings could remain relatively flat – or even start falling. Further equity gains (assuming steady bond yields) would then require a further narrowing in the EBYG.
Assessing the relative valuation of the Australian market is complicated by changes in relative interest rates and risk premiums in recent years.
As seen in the chart set below, although the local market’s relative earnings yield differential (inverse of the PE ratio) has moved to the bottom of its range of recent years, the narrowing in relative interest rates over this period has been even greater.
As a result, Australia’s equity market no longer appears as expensive as it once did on a relative interest rate basis compared to global peers. In fact, Australia’s EBYG is now close to the global level – with the currently higher PE (lower earnings yield) offset by lower interest rates. All up, this suggests that if local interest rates stay relatively steady, Australia’s market could continue to trade at a PE valuation premium. Relative earnings, however, may well continue to underperform, especially given our greater exposure to China and the global impact of the coronavirus currently unfolding.
Global Equities Trends
Across BetaShares currency-hedged global equity sector/thematic funds, global gold miners (MNRS) and health care (DRUG) were the best performers in the month and remain the strongest relative performers**. That said, most other exposures are presently in relative performance downtrends*, reflecting stronger performance among US, technology and other more growth-orientated thematics.
Among BetaShares unhedged global equity sector/thematic funds, the US tech-heavy NASDAQ-100 Index (NDQ) along with global quality (QLTY) continued to perform strongly in January, along with India (IIND) and global cyber-security (HACK). NDQ and QLTY are currently the only unhedged global exposures in relative performance uptrends – though prior to this month’s coronavirus concerns, Asia technology (ASIA) was displaying tentative signs of a relative performance uptrend.
Australian Equity Trends1
Among BetaShares Australia equity ETP themes, the small/mid-cap focused EX20 ETF, the fundamentally-weighted QOZ Australian equity ETF and yield-focused EINC Fund have the best relative performance trends, but the market more broadly is still being led by the potential growth opportunities in the health care, technology and consumer discretionary sectors.
Both the resources and financial sectors continue to struggle in terms of relative performance, as does the small-cap sector. While trending up in outright terms, listed property and the infrastructure sectors are also in relative performance downtrends – low yields at present are encouraging a chase for growth, rather than yield!
*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.
Australian ETP Themes’ Chart – Source: Bloomberg. As EINC and RINC commenced trading in February 2018, for illustration purposes the performance information for the period prior to the inception date is based on the respective unlisted Legg Mason Martin Currie Equity Income Fund and Legg Mason Martin Currie Real Income Fund, being comparable funds managed by Martin Currie Australia using the same strategy applied for EINC and RINC. Performance is shown net of management fees. EINC and RINC’s strategy is not constrained by a benchmark and is shown against the relevant benchmark purely for comparison purposes. Historic performance of EINC, RINC or the unlisted funds, is not a reliable indicator of future performance.