Market Trends: July 2020 | BetaShares Insights

Market Trends: July 2020

BY David Bassanese | 8 July 2020
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Market Trends: July 2020

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Key global trends – equity rally continues

The global equity market recovery continued into June, reflecting a lift in some economic indicators as social distancing restrictions eased and investors remained confident that central banks will keep monetary conditions extremely easy. The influence of U.S. monetary stimulus is evident in other markets, with a further easing in the U.S. Dollar and bond yields, and further gains in gold.

The MSCI All-Country World Equity Return Index rose by 2.9% in local currency terms, after a gain of 4.3% in May. As seen in the chart set below, global bond yields remain in a strong downtrend, and gold prices in a strong uptrend*. Although relative to their 12-month moving average, global equities and the $US dollar are now defined as in an uptrend and downtrend respectively, from a broader perspective both remain in a choppy sideways range.

Global equity fundamentals – counting on low bond yields and stabilisation in earnings expectations

As seen in the chart pack below, the rebound in global equities of late has largely been driven by a strong rebound in PE valuations, with the forward PE rising from 14.7 at end-March to 19 at end-June.

By recent historic standards, equities also appear expensive relative to bond yields, with the equity-to-bond yield gap (EBYG) easing of late to 4.3% – at the lower end of its 5-year range, and below its 10-year average of 5.4%. That said, one upside risk for equities is if an expectation of ‘lower for longer’ bond yields causes equity PE valuations to re-rate even higher, given that the EBYG is still a little above its 20-year average (4.2%) and well above its 50-year average (2.1%).

A sharp fall in forward earnings over recent months, reflecting downgrades to earnings expectations, has also helped push up valuations. Effectively, investors are attempting to ‘look through’ recent earnings weakness on the grounds that it may prove only temporary.

One hopeful sign in this regard is that global forward earnings over June registered their first uptick for the year – as there was a slowing in the rate of earnings downgrades. If earnings expectations don’t fall further, the still-bullish outlook for CY’21 earnings (30% growth, returning earnings close to the level of 2019) will push up forward earnings further in coming months. That said, especially with the U.S. soon to commence its Q2 earnings reporting season, risk seems tilted towards more significant earnings downgrades in coming months.

Sector and regional equity trends

Currency-hedged and Australian funds

The table below details the outright and relative performance trends of the indices tracked by BetaShares’ global currency-hedged and domestic equity funds, benchmarked against the MSCI All-Country Equity Index in local currency terms.

The strongest performers over recent months have been global gold miners (MNRS), Australian technology (ATEC) and global health care (DRUG). In June, both MNRS and ATEC continued to perform strongly, and over the June quarter both produced returns of around 50%!

June, however, also saw solid gains in European equities (HEUR) and local financials (QFN), perhaps reflecting investor interest to seek potentially better value opportunities in less strongly performing market areas.

BetaShares Hedged Global Equity and Australian Equity Funds – Index Performance
Source: Bloomberg. Table ordered by 6/12 month return performance. Past performance is not indicative of future performance of the index or the fund. Table shows performance of the index each fund aims to track, and not of the fund itself. Does not take into account fund fees and costs. You cannot invest directly in an index.

Unhedged global funds

The table below details the outright and relative performance trends of the indices tracked by BetaShares’ global unhedged equity funds, benchmarked against the MSCI All-Country Equity Index in unhedged $A terms.

The strongest performers over recent months have been technology thematics such as Asian technology (ASIA), the NASDAQ 100 (NDQ) and global cybersecurity (HACK).

In June, ASIA continued to post solid returns, and our active emerging market fund (EMMG) also rose solidly. Again, this may be a tentative sign that investors are starting to seek value elsewhere, with emerging markets especially helped by a weaker U.S. dollar.

BetaShares Unhedged Global Equity Funds – Index Performance
Source: Bloomberg. Table ordered by 6/12 month return performance. Past performance is not indicative of future performance of the index or the fund. Table shows performance of the index each fund aims to track, and not of the fund itself. Does not take into account fund fees and costs. You cannot invest directly in an index.

Cash and bonds – government yields drop, credit spreads widen

In the local bond market, overall bond yields plumbed new lows in June and credit spreads contracted further (though remained above their lows earlier this year). As a result, fixed-rate bonds continued to outperform cash, especially longer-duration corporate exposures (CRED). Narrowing credit spreads also supported hybrids (HBRD) and floating-rate bonds (QPON) over cash (AAA). 

Source: Bloomberg. Past performance is not indicative of future performance of the index or fund. You cannot invest directly in an index. Index performance doesn’t take into account any fund fees and costs.

*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.


 

5 Comments

  1. Warren Smith  |  July 8, 2020

    Hi David, hope you are well and was wondering why ETHI’s share price is struggling so much at present and if you have an idea on the cause?
    Kind Regards, Warren

    1. BetaShares Client Services  |  July 9, 2020

      Hi Warren,

      Last week was the ex-distribution date for a number of our funds. Once a fund goes ex-distribution, it’s price will typically fall by the amount of the distribution (as the cash held in the fund is now set to be paid out to the relevant unit holders).

      In the case of ETHI, the distribution for this period is $1.09 per unit, causing the price of the fund to decline on the ex-distribution date.

      Hope this helps.

      Sincerely,

      BetaShares Client Services

  2. Justin  |  July 9, 2020

    Hi,

    Why was the distribution price so high for ETHI? It seems the previous dividend amounts weren’t near the amount of this period, hence such a dramatic drop.

    Cheers Justin

    1. BetaShares Client Services  |  July 10, 2020

      Hi Justin,

      This distribution for ETHI is much larger than usual this period due to the capital gains that the fund has incurred through the process of rebalancing (e.g. selling shares in a company at a capital gain). This capital gain is paid out by the fund to unitholders in the form of a distribution. Capital gains of this size are not regular, and the distribution for the fund is usually much smaller.

      Sincerely,

      BetaShares Client Services

  3. Warren Smith  |  July 9, 2020

    Thanks for your response.

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