Re-opening trades: three attractive global value opportunities - BetaShares

Re-opening trades: three attractive global value opportunities

BY David Bassanese | 4 June 2021
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Re-opening trades

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With global growth benefiting from the vaccine rollout and re-opening of shuttered parts of the economy, so-called ‘value’ investment exposures have been performing, and could continue to perform, relatively well. This note outlines three potentially attractive global value opportunities from the suite of BetaShares funds.

Time for a ‘value’ catch-up?

One of the many unusual features of last year’s COVID crisis was the way in which growth exposures – particularly technology – did especially well during the market downturn. That reflected the fact that many leading technology companies – such as Google, Amazon and Netflix – benefited from the trend towards working from home and buying online. At the same time, many usually defensive ‘value’ exposures such as infrastructure and utilities were hurt by the sharp drop in demand for electricity and transportation.

Given the fast rollout of vaccines in many leading economies such as the United States, however, COVID-related risks appear to be dissipating. Indeed, primed by high levels of monetary and fiscal stimulus, global economic growth appears to be roaring back far faster than most expected only a few months ago.

Associated with this, we’ve also seen a global rotation back to value parts of the equity market. Outlined below are three investment exposures that appear correlated to the rebound in value, and which hence may continue to perform relatively well should this rotation last.

UK equities (ASX: F100)

As we have previously outlined, UK equities appear to have many attractive qualities: relatively high global earnings exposure, relative cheapness and relatively high dividends. I’ve also long suggested that due to its relatively open and deregulated nature, the UK economy will likely emerge from Brexit uncertainty reasonably quickly, and may be well-positioned to outperform continental Europe over the next few years.

As seen in the chart below, moreover, the relative performance of UK equities is correlated with the performance of global value relative to global growth stocks. With financials and consumer staples each currently accounting for just under 20% of the FTSE 100 Index, this value bias should be no surprise. As evident, the relative performance of the F100 ETF has been improving since last last year, in line with the global rotation to value stocks.

F100 vs Global Equities

Source: BetaShares, Bloomberg. Index performance does not take into account ETF fees and costs. You cannot invest directly in an index. Past performance is not indicative of future performance of any index or ETF.  Global Equities represents MSCI All Country World Index. *Ratio of total return indices in AUD.

S&P 500 Equal Weight exposure (ASX: QUS)

Due to the current heavy concentration of the market-cap weighted U.S. 500 Index to large technology stocks, the equally-weighted S&P 500 counterpart index (as tracked by the QUS ETF) is naturally underweight technology and more exposed to smaller value-orientated companies. Indeed, the five largest S&P 500 companies by market-cap now account for almost 25% of the Index – a level not seen in several decades – compared to a combined weighting of just 1% in the equally-weighted Index.

As evident in the chart below, the relative performance of the equal-weight S&P 500 Index versus the market-cap weighted index has also tracked the relative performance of global value vs. growth stocks reasonably well in recent years. If value continues to rebound – and technology generally underperform – the equally-weighted index may be well-placed to continue to outperform the S&P 500 market-cap index.

QUS vs Global Equities

Source: BetaShares, Bloomberg. Index performance does not take into account ETF fees and costs. You cannot invest directly in an index. Past performance is not indicative of future performance of any index or ETF.  Global Equities represents MSCI All Country World Index. *Ratio of total return indices in AUD.

Global income (ASX: INCM)

Stocks offering relatively high dividend income tend to be value in nature, with relatively high exposures to sectors such as utilities and consumer staples.

As evident in the chart below, relatively high income global stocks – as represented by the INCM ETF – were especially hurt along with value in general during the COVID downturn earlier last year. But along with value, high income stocks have also outperformed since late last year.

INCM vs Global Equities

Source: BetaShares, Bloomberg. Index performance does not take into account ETF fees and costs. You cannot invest directly in an index. Past performance is not indicative of future performance of any index or ETF.  Global Equities represents MSCI All Country World Index. *Ratio of total return indices in AUD.

Note the INCM ETF also managed to outperform in the years following the global financial crisis – even though value tended to underperform – which could reflect the continued trend decline in bond yields over this period (see chart below).

INCM began to underperform following the low in bond yields in 2016, but underperformance persisted even as bond yields fell from late 2018 to late 2020.

Especially following the sharp decline in relative performance last year, this suggests income plays could be one of the late-recovery stories of the COVID crisis – and may become especially attractive again if, as following the GFC, central banks refrain from raising official interest rates for several years. With a current 3.2% 12-month distribution yield, INCM also offers a useful source of equity income diversification outside of the bank-heavy Australian market.

INCM vs US 10 yr bond yield

Source: BetaShares, Bloomberg. Index performance does not take into account ETF fees and costs. You cannot invest directly in an index. Past performance is not indicative of future performance of any index or ETF.  Global Equities represents MSCI All Country World Index. *Ratio of total return indices in AUD.

There are risks associated with an investment in the BetaShares Funds, including market risk, country risk, currency risk, concentration risk and index tracking risk. For more information on risks and other features of each BetaShares Fund, please see the applicable Product Disclosure Statement, available at www.betashares.com.au.

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