Key Global Trends – equities still pushing higher
Major trends across the four major markets we track above remained unchanged last month, with global equities, gold and the $US still pointing up, and global bond yields still pointing down.
Hopes of a US-China trade deal, a good US earnings reporting season, and tentative signs of stabilisation in global manufacturing indicators supported global equities in October, which made new highs on a month-end basis.
Despite the risk-on sentiment, gold prices also rose, perhaps supported by weakness in the $US – the world’s other non-bond safe haven. Global bond yields also rose only modestly last month, supported by continued low inflation and retention of a clear easing bias by most major central banks. The US Federal Reserve cut interest rates for the third time this year, though hinted at a reluctance to cut further if global sentiment continued to improve. The market, however, continues to expect further Fed easing.
If current risk-on sentiment continues, it would not surprise to see global bond yields push higher in coming months, and both gold and the $US weaken.
Global Equities – Fundamentals Update
As seen in the chart pack below, the uptrend in global equities so far this year continues to be led by PE valuations rather than earnings, with the latter in turn supported by the decline in bond yields. As at end-October, the global forward PE ratio edged up to 15.3, from 15.1, compared with a 10-year average of 13.9. Global bond yields edged up to 1.34% from 1.30%, which is still below their 10-year average of 1.94%. As a result, the global equity-to bond yield differential eased down to 5.2% from 5.3%, to remain only modestly below its 10-year average of 5.4%.
Over recent years, the highest month-end PE ratio reached by global equities has been around 16 to 16.5, or around 6% above current levels.
After solid gains from early 2016 to late 2018, global forward earnings peaked in November last year and declined by 4% by end-March 2019, reflecting sharp declines for earnings expectations in 2019 and 2020. That said, there are tentative signs that the downgrades to global earnings expectations for 2020 and 2021 are flattening out, which has so far resulted in a modest lift in forward earnings by around 2% since end-March. If current earnings expectations hold, forward earnings would rise by 9.6% over the coming 12 months.
Global Equities Trends
Across BetaShares currency-hedged global equity sector/thematic funds, stronger gold prices saw global gold miners rebound (MNRS), and this remains the strongest relative performing exposure. In second place remains European equities (HEUR), supported by recent weakness in the Euro versus the $US.
Across unhedged global equity sector/thematic funds, India (IIND) continued to perform well, thanks to Government fiscal stimulus via tax cuts – and this remains the strongest relative unhedged performer. Global quality (QLTY) and US technology (NDQ) are the next strongest relative performers.
Australian Equity Trends
Weakness among large-cap banks and resource stocks last month saw the S&P/ASX 200 under-perform global markets. This in turn reflects weakness in iron-ore prices and concerns about bank profit margins as the RBA continues to cut official interest rates.
Among BetaShares Australia equity ETP themes, the Ex20 ETF performed the best, while the RINC real assets fund exposure continued to hold steady. These two exposures, along with the equity income fund EINC, are the top three relative performers. Overall, this reflects potential emerging trouble among Australia’s large-cap financial and resource stocks, along with a search for defensive yield elsewhere in the market.
Cash, Bond and Hybrid Trends
Across BetaShares Australian cash, fixed-income and hybrid funds, a further rebound in local bond yields produced another month of negative returns for our long duration Australian government (AGVT) and corporate bond (CRED) ETFs. That said, the downtrend in bond yields in recent months has meant these funds still produced strong returns over the past year.
Among floating rate exposures, the active hybrids fund (HBRD) produced a small decline, reflecting a small widening in credit spreads.
*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 RINC and EINC commenced trading in February 2018, for illustration purposes the performance information for the period prior to the inception date for those funds is based on the unlisted Legg Mason Martin Currie Real Income Fund (for RINC) and the unlisted Legg Mason Martin Currie Equity Income Fund (for EINC), being comparable funds managed by Martin Currie Australia using the same strategy as each fund. Performance is shown net of management fees. These strategies are not constrained by a benchmark and are shown against the S&P/ASX 200 Accumulation Index purely for comparison purposes. Historic performance of the unlisted funds, or RINC or EINC, is not a reliable indicator of future performance.