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Key global trends – equities rebound
Following heavy losses in March, global equities rebounded in April on hopes that coronavirus-driven economic shutdowns would quickly ‘flatten the curve’ of new infections and allow economies to re-open. Extreme monetary and fiscal policy responses also supported investor optimism. The MSCI All-Country World Equity Return Index rose by 10.4% in local currency terms, after a decline of 12.8% in March. After some credit market disruptions in March, the yield on the Bloomberg Global Aggregate Bond Index edged back down in April, from 1.17% to 1.0% p.a., allowing global bonds to post a modest gain in the month. The $US stabilised after recent solid gains while gold prices pushed higher.
As seen in the chart set below, global bond yields remain in a strong downtrend*, and gold prices in a strong uptrend. The $US has leveled off into a choppy range over recent months though still with an upward bias, while global equities still appear to have a downward bias.
Global equity fundamentals – watch earnings
As seen in the chart pack below, the rebound in global equities – at the same time as earnings expectations have fallen sharply – has pushed the price-to-forward earnings ratio to a relatively high 17.7 – higher than at the market peak earlier this year. CY’20 earnings are now expected to fall 19% below CY’19 levels before rebounding by 25% in CY’21. Earnings expectations are likely to drop further in the weeks and months ahead.
Given the drop in bond yields, and rise in PE ratio, the equity-to-bond yield gap (EBYG) (a measure of relative valuations) narrowed to 4.7%, which arguably is still reasonable relative to the average of 4.9% since 2005. As noted last month, however, of concern is the likely continued downtrend in earnings expectations, which will tend to push up PE valuations unless equity prices also adjust downward to some degree.
Global equity trends – health care, gold, technology and quality
Across BetaShares’ currency-hedged global equity sector/thematic funds, global gold miners (MNRS) and health care (DRUG) were again strong relative performers in the month and retain high relative momentum**. Major energy producers (FUEL) also bounced back strongly last month in expectation that oil prices might eventually rebound. Otherwise food, financial and European stocks continued to generally underperform, while Japanese relative performance remains patchy.
Among BetaShares’ unhedged global equity sector/thematic funds, technology and quality themes are holding up best, though emerging markets also rebounded last month after recent relative weakness. The top three relative performers are the tech-heavy NASDAQ-100 Index (NDQ) and Asia technology ETF (ASIA), followed by global quality (QLTY).
Australian equity trends – technology and resources
Among BetaShares’ Australian equity sector/thematic funds, technology (ATEC), resources (QRE) and small/mid-cap exposures (SMLL and EX20) performed best last month, while financials (QFN) continued to underperform. Technology, resources and small caps have the strongest relative performance compared to the market, but remain in outright price downtrends. Along with financials, listed property has also lagged of late, which has contributed to the relative underperformance of high-yield market exposures. Infrastructure has so far held up better than listed property, with active exposure to both these sectors available through the RINC fund.
Cash and bonds – government yields drop, credit spreads widen
Local bond yields held at low levels last month, while credit spreads contracted marginally. The stabilisation in yields saw a leveling out in fixed-rate bonds returns relative to cash, with relative performance of credit exposures improved.
Source: Bloomberg. Past performance is not indicative of future performance.
*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.
ETP Themes’ Charts – Source: Bloomberg. EINC and RINC commenced trading in February 2018; EMMG commenced trading in May 2019. 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, Legg Mason Martin Currie Real Income Fund and Legg Mason Martin Currie Emerging Markets Fund, being comparable funds managed by Martin Currie Australia using the same strategy applied for EINC, RINC and EMMG. Performance is shown net of management fees. EINC, RINC and EMMG’s strategy is not constrained by a benchmark and is shown against the relevant benchmark purely for comparison purposes. Historic performance of EINC, RINC, EMMG or the unlisted funds, is not a reliable indicator of future performance.