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Key Global Trends – equities retreat
The coronavirus-led ‘risk-off’ trade that started to build in late January continued into February and the early weeks of March. Global equities have reversed their uptrend* seen through most of 2019, while the downtrend in bond yields and uptrend in gold prices has continued. The $US is also showing signs of weakness so far in March, with expectations of significant US monetary stimulus to offset potential weakness in the US economy arising from the global virus outbreak.
Global Equity Fundamentals
As seen in the chart pack below, the decline in global equities has pushed the price-to-earnings ratio from a high of 16.3 in January to near-average 14.0 by early March. Given the further large decline in bond yields, the equity-to-bond yield gap (EBYG) (a measure of relative valuations) has pushed out to an above-average level of 6.3%. As noted last month, however, of concern is the continued downtrend in earnings expectations, which suggest forward earnings will at best remain flat for several more months or even decline somewhat if global growth slows further.
Global Equity Trends
Across BetaShares currency-hedged global equity sector/thematic funds, global gold miners (MNRS) and health care (DRUG) have been the best performers in recent months and remain the strongest relative performers**. Financial and energy stocks continue to be hurt by declining bond yields and oil prices respectively, while Europe, Japan and the food sector also continue to underperform.
Among BetaShares unhedged global equity sector/thematic funds, the Asia technology ETF (ASIA) and the emerging market active ETF (EMMG) have held up relatively well since January, which is consistent with broader EM outperformance over this period – possibly in turn associated with a weakening in the $US. The solid uptrend in relative performance by the tech-heavy NASDAQ-100 Index (NDQ) and global quality (QLTY) also remain in place.
Australian Equity Trends***
The major financial and resource sectors of the Australian market continue their period of trend* underperformance, with the former also hurting performance of the high-yield segment of the market. That said, the growth segment of the market continues to outperform, helped by exposure to the dominant health care stock, CSL. Indeed, health care, consumer staples and telecommunications have the strongest trend relative performance**.
The recent market sell-off has also seen relative outperformance by the infrastructure and listed property sector, as investors seek defensive yield opportunities outside of the beleaguered banking sector. Exposure to both of these sectors is available through the ‘real income’ RINC Active ETF.
*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.