Macro outlook supports the mining sector but further upside remains muted
ETF Securities Equity Research: Macro outlook supports the mining sector but further upside remains muted
Highlights
Demand for metals remains well supported by a favourable macro-economic backdrop but China’s reform policy is expected to soften future metal demand.
The benefits of the weaker US dollar on higher commodity prices are outweighed by higher local currency input costs for producers in the mining sector.
Capex growth has turned positive for the first time in five years and the electric car revolution opens further avenues of investment for the mining sector.
Strict capital discipline among the miners has improved operational efficiency but miner’s valuations are not cheap.
Macro outlook supports demand
The global economy looks set to embark on a strong growth trajectory evident from the improvement in global purchasing manufacturing indices (PMI) since the second half of 2016. The optimism over global expansion increasing consumption of metals has led to a revival in the price of most metals this year. As a consequence, we have witnessed the top 100 diversified miner’s aggregate price appreciate 86% since 31 January 2016 (Source: Bloomberg).
Added to that, the current weakness of the US dollar is acting as an important catalyst in fuelling the commodity price rebound. As the world’s largest economy enters the late stage of the economic expansion cycle we expect to see tightening of the labour market combined with rising inflation, commodity prices and interest rates as the Federal Reserve normalises policy. The raw industrials index and the trade weighted US dollar tend to move inversely to each other with a negative 0.80 correlation. This counter cyclical relationship bodes well for base metal prices as investors look towards metals as a store of value versus the greenback. While the mining sector will benefit from higher commodity prices, the weaker US dollar could temper the benefits for producers that have a high proportion of costs in local currency.
China’s reforms take centre stage
A government led initiative in China’s construction industry since early 2016 underpinned the rebound of industrial metal prices. The emphasis on reforms as highlighted by President Xi at 19th National Party Congress in October 2017 suggests Chinese economic growth will gravitate more towards services and consumer spending. These activities are significantly less resource intensive and could soften demand for industrial metals. Added to that, the ongoing cooling of fiscal stimulus to the manufacturing and construction industries that kick started in H217, will further dampen new demand for industrial metals.
That being said, China’s supply side reform, to tackle environmental pollution, address unlicensed production and excess supply, resulted in significant escalation in metal prices last year. The widespread efforts improved capacity utilization rates within the aluminium, coal and steel industries. To a large extent, the impact of the capacity reductions in steel and coal appear to have already passed their peak, as the Chinese governments met their targets late last year.
Miners are back in business
After five consecutive years of negative growth in capex, total spending has finally turned positive, rising 8% since the prior year. A large part of the spending has been dedicated to sustaining production rather than expansionary projects. Miners are tapping into the new sources of growth led by technology driven innovation. At the forefront of this revolution, electric car production is expected to bolster demand for lithium, cobalt, copper and aluminium. Mining companies owning lithiumand cobalt deposits are well positioned to benefit from rising demand owing to their use in battery cathodes.
Ongoing supply deficits projected
A vast variety of metals are projected to continue to extend their supply deficits into 2018 as demand outstrips supply. Declining inventory levels of global metals stocks namely – zinc, copper, aluminium, platinum, palladiumand tin remain supportive of their price recovery. However deteriorating ore grades and falling reserves, make it vital for miners to undertake further exploration projects to maintain their current production.
Miners are not cheap
Owing to the challenging pricing environment between 2011 and 2016 the mining sector imposed a stricter capital discipline in an effort to shore up their balance sheet. Since mid-2016, valuations for the sector have climbed in lock step with rising profitability. Mining stocks currently trade at 17x earnings compared to the long term average of 10x, supported by higher earnings growth (Source: Bloomberg, as of 30 January 2018). Meanwhile, the current price to book ratio at 2x trades in line with its long term average of 1.7x as impairments charges reduced significantly. Recovering commodity prices, an emphasis on debt repayments and improving liquidity have helped alleviate pressure from ratings agencies as ratings outlooks for base and precious metal miners turn positive.
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
This communication may contain independent market commentary prepared by ETFS UK
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
Three thoughts on 2018 By Didier Saint-Georges – Managing Director, Investment Committee Member
Detailed market predictions are only of limited value. For example, the consensus forecast twelve months ago was for the S&P to rise 6% over the year – a result the index achieved in just six weeks. The same analysts, by the way, had anticipated an average 10% increase in the S&P 500 in 2008. What they got instead was a 40% nosedive. The investors with the best track record in 2017 often expected at the start of the year a strong dollar and higher interest rates. However, they were capable of shifting gears, ditching their prior views and leveraging new trends. Or else they were lucky enough to be mainly invested in euros.
To be sure, crafting a central scenario is an essential first step. (We presented ours for 2018 in Carmignac’s Note of December, “Fooled by the Cassandra syndrome”.) But such a scenario must be underpinned by an analysis of both upside and downside risks – in other words, an understanding of the key challenges that could push markets dramatically upwards or downwards in the event of a major inflection.
Awareness of potential risks and rewards does not preclude an opportunistic approach. If anything, we should have been more opportunistic this past year. That said, in the long run, such an awareness is vital to generating solid performance across market cycles.
Those challenges fall into three distinct yet interdependent categories: market configuration (valuations, liquidity, positioning, sentiment, flows), macroeconomic factors (growth, inflation, interest rates) and political factors (sovereign risk, geopolitical risk, electoral upsets).
Our analysis suggests that in 2018 issues with a crucial impact on all financial markets will loom much larger than in 2017. That highlights the need to keep our eyes wide open as the year unfolds.
Political factors
The investment community widely assumes that this area is of only secondary importance to markets, and rightly so. It is even tougher to forecast political developments than economic changes, not to mention their effect on financial markets. Moreover, because this past year’s elections in the United States, the United Kingdom and continental Europe proved to be less momentous than anticipated, a good many investors now seem to feel they can safely ignore politics altogether. We don’t view that as such a good idea at present, and for three main reasons.
First, the financial and economic impact of political events often takes a while to show up on the radar screen. For example, we can reasonably expect the blowback from the pro-Brexit vote to cause greater economic pain in 2018 than in 2017. A weaker pound sterling will raise the cost of imports and thus take a large bite out of household spending. At the same time, the upcoming second phase of the negotiations between Britain and the European Commission on their future trade relations will generate additional uncertainty – regarding both the ultimate terms agreed to and the future of the May Government – that is likely to discourage investment in the country. And lastly, any monetary tightening by the Bank of England to defend the national currency would intensify the nascent economic slowdown. We are therefore starting the year with a short position on sterling which should pay off if a downward spiral gets going.
On the other side of the Atlantic, Donald Trump’s protectionist rhetoric, which was more or less put on the back burner in 2017, will probably move up the list of policy priorities in 2018. Once the US President is back on the economic warpath, most notably against China, he might well wield a more competitive dollar as a weapon. We have accordingly begun the year with ample exchange rate hedges on our dollar-denominated assets. On the other hand, it is worth noting that this outlook will potentially mean good news for our emerging market holdings, which we have beefed up. The second reason for taking politics seriously in 2018 is that several far-from-innocuous elections are scheduled to take place. In Mexicoand Brazil, the outcomes will determine whether the reform policies under way will continue or not. Closer to home, the formation of a new Government in Germany in the coming weeks and the Italian elections in March will send out very clear signals as to whether the recent pan-European wave of reform initiated by French President Macron last year will hold out. Special attention must be paid in this environment to sovereign yields on the EU periphery. Assuming political developments take a favourable turn – our central scenario – Europe’s single currency, which is preponderant in our portfolios, will come out ahead.
We are also keeping a close watch on developments in the Middle East, a region currently wracked by the threat of political and therefore economic instability. As the historical record shows, lastingly autocratic regimes find themselves highly vulnerable when they finally make a timid attempt at reform, most often under pressure. (This is a danger that Chinese President Xi Jinping strongly senses and takes great pains to avoid.) We consider our holdings in Western oil producers, particularly American, and our gold stocks a high-potential form of insurance against mounting political risk in the Middle East.
Macroeconomic factors
“Any disappointments in relation to global growth would work to the advantage of growth stocks in the US and emerging markets”
Rippling out from China’s industrial stimulus programme in early 2016, the global economic upswing proceeded so fast that it proved to be the outstanding pleasant surprise of 2017. Citigroup’s US Economic Surprise Index reached an all-time record at year-end, and while the Eurozone equivalent saw less spectacular progress, it still jumped at end-November to its highest level since 2010. No offence is meant to economists when we point out that this index is a fairly reliable contrarian indicator of surprises to come. Now that the economic forecasts for 2017 have turned out to be way too pessimistic, they have predictably been revised upwards for 2018 – just when sentiment, consumer spending and output are going at full steam.
So even if it is fair to expect the global economy to keep up the pace in 2018, the risk this time around is rather that the news will be disappointing. Now, this outlook involves a certain amount of risk for equities, particularly those in cyclical industries fuelled until now by US tax reform and the recovery in Europe. But it also opens up opportunities, above all in the United States – which is where we see the greatest chance of disappointment, leaving the dollar more vulnerable and limiting the rise in interest rates, this scenario would give a hefty boost to growth stocks in the United States and the emerging markets, which make up a significant share of our holdings.
Source: Carmignac, 31/10/2017
Market configuration
“Market price distortion certainly reached a pinnacle in 2017”
Financial markets as a whole have experienced a historic bull phase for close to ten years now, and that’s putting it mildly. Worldwide stock market capitalisation has tripled since its 2009 low. Even more striking is the fact that bond and credit markets have also performed well. It is worth stressing the irony of this financial market chain reaction. After all, the failure of central banks to push up inflation was what justified those long years of systematic bond-buying through expansion of the money supply, whose inevitable effect was to boost all asset classes – in violation of economic rationality. The increasing weight of passive and algorithm-based asset management styles has amplified the trend.
Market price distortion certainly reached a pinnacle in 2017: the long-awaited economic upswing, which accelerated the stock market rally, has yet to trigger any serious adjustment in bond markets. But on that front, 2018 may well mark a major turning-point. Though the central banks won’t abruptly cut off the flood of cash they have poured into financial markets since 2009, they will gradually scale back their monthly worldwide injections, most likely to zero by the end of the year. In fact, the US Federal Reserve will go into net liquidity withdrawal mode for the first time ever. Steering such a historic shift without setting off violent market corrections is the unprecedented challenge soon to face central bankers. Meanwhile, now that even most conventional safe-haven assets have become exceedingly pricey, risk managers will need to make use of appropriate hedge instruments to actively manage exposure levels.
As we mentioned in the introduction, those three categories – political, macroeconomic and technical market factors – are distinct yet interdependent. A belated surge in inflationary pressure would encourage central banks to proceed faster with monetary policy tightening, underscoring in the process how overpriced bonds now are. Conversely, any disappointments on economic growth, or even inflation, would put central bank credibility to the test.
At the same time, investor sentiment, as currently reflected in valuations and historically low market volatility, will be sensitive to both central bank policy and the political environment. Financial markets form a system, one whose internal workings have experienced unprecedented distortion as a result of central bank intervention. Going forward, that system is set for a sea change. And when it comes, there will be radically new risks and opportunities for investors.
Source: Bloomberg, 2/1/2018
Investment strategy
Equities
Equity markets ended the year with a bang as Brazil and other emerging economies pulled out in front in December. With equity exposure close to the maximum allowed for our funds and thanks to our overweight position in emerging markets, we reaped the benefits of that trend. In sectorial terms, our balanced allocation policy enabled us to offset selective profit-taking on tech stocks with our commodity positions (gold mines and oil producers), which posted solid gains during the month. We have also continued to diversify our tech portfolio, seeking out new investment ideas with the potential to capitalise on the structural shifts under way. For example, during our latest study trip to the United States, we initiated a position in Shopify, a multi-brand, multi-channel e-commerce platform.
We also factored in the tax reform passed in the United States and accordingly raised our exposure to the US financial sector. Among other positions, we bought Synchrony Financial, a consumer financial services company. With the business cycle soon likely to peak, we are entering 2018 with a particular attention approach to stock-picking, coupled with a soundly diversified, balanced geographic and sectorial allocation.
Fixed income
The market had well anticipiated both the far-reaching tax-cut law passed by Congress and the Fed’s intention to hike interest rates again. The result was that neither change had much of an impact on US Treasury yields, which along with those of Germany gained less than 10 basis points during the month. Thanks to adroit handling by the central bankers – with Mario Draghi’s patient, prudent stance on normalising the Eurozone’s monetary policy worthy of special mention – safe-haven sovereign yields held largely steady throughout 2017. In contrast, 2018 is likely to be a more trying year for the European Central Bank as the Fedcarries on with its normalisation plans. That explains why we maintain our short position on German government bonds.
Because we were invested across bond market segments offering attractive risk premia, we had little trouble managing the mixed developments of December. On the EU periphery, we took advantage of the sharp drop that Greek bond yields experienced in December, even as Italian yields crept upwards. In the emerging market space, our Brazilian debt positions sustained their rally in December, although our Mexican bonds were hurt by the geopolitical climate.
Currencies
The euro finished the year on a positive note, appreciating by over 10% against the dollar over the 12-month period. And as we believe that secular issues underlie the greenback’s current weakness, we plan to maintain our majority allocation to Europe’s single currency. A weaker dollar has translated into greater strength for emerging market currencies, except for a Mexican peso dogged by both domestic political woes and tense negotiations over the future of the North American Free Trade Agreement (NAFTA).
Having identified that risk during our latest trip across the Atlantic, we selectively put in place hedges on the Mexican currencyin our emerging market funds. One last point on currencies potentially exposed to geopolitical risk. In our global funds, we continue to be sellers of the British pound.
ETF Securities Portfolio Insights: A closer look at emerging market equities
Summary
Global equities have been rallying in 2017, led by Asian emerging countries and North America to a lesser extent.
The IMF expects Asian economies to continue to drive global growth while central banks in advanced economies are gradually reducing their financial support.
We believe US equities are overvalued and see greater opportunities within Latin American and Asian equities for 2018.
Global equities have been rallying since the end of 2016 as strong economic data from major advanced and developing countries combined with a decline in perceived political uncertainty has led to a surge of optimism on the global financial market. Extremely accommodative monetary policies in place since the great financial crisis are bearing fruit. 2018 will likely see these accommodative policies gradually dismantled, opening the path to new investment opportunities.
2017 performance
This year has seen global equities rallying since November 2016 as market participants are more confident that global economic growth has returned and will continue. While few risks remain, with the Italian election next year and the ongoing fight against terrorism and North Korea, the populist threat seen in 2016 has faded away. Unemployment is near its lowest in the US and UK with central banks now focussing on dismantling quantitative easing and tackling the inflation issue.
Looking at 2017 performance so far, the MSCI AC World index rose by 22%, driven by the rally of emerging markets (EM) and more specifically, emerging countries from Asia (39%). The developed markets (DM) with North America come second at 19.5%, followed by emerging Latin America at 18.5%. While one would expect volatility to pick up, 2017 saw the market volatility index (VIX) at its lowest level ever, at 9.6 on average, compared to 20 its historical average, suggesting that investors could increase their allocation to equities almost risk free.
Of the top 20 performers, 75% are emerging market countries. Argentina is leading the board with 62.6% year-to-date while China comes fourth (52%) and India eleventh (25.7%).
In its October World Economic Outlook, the International Monetary Fund (IMF) estimated global growth at 3.6% in 2017 and 3.7% in 2018 from 3.2% in 2016 driven by rising industrial activities and business and consumer confidence. Global growth will be mainly driven by EM countries projected at 4.6% in 2017 and 4.9% in 2018. China GDP has been revised upward by 0.2% compared to April, at 6.8% in 2017 and 6.5% in 2018 while India GDP for 2017 was revised down from 7.2% to 6.7%. In Latin America, Argentina is expected to rebound after last year’s recession with growth projected at 2.5% for 2017 and 2018 as consumption and investment recover.
What are the ratios saying?
The cyclically adjusted price to earnings ratio (CAPE) of DM over EM shows that developing countries remain attractive from a valuation point of view. Whilst the MSCI Emerging Market index has returned 30% year-to-date, the below chart suggests there is still scope for further gains in 2018.
In the following chart, the Latin American countries Argentina, Brazil, Colombia, Mexicoand Chile, appear to be the most undervalued. Despite prices for these countries rising by 23% on average, the CAPE ratio remains below their respective historical averages driven by lower-than-average real earnings. However, all except Chile saw their real earnings growing this year in absolute terms, suggesting further potential catch-up of their earnings in the near term.
At the other end of the spectrum, US, Japan and few European countries are considered as overvalued. The CAPE ratio for each stands above their historical level due to real earnings having already catched up with its respective historical level and price rally. Further gains would be more difficult to justify.
A closer look at China
Xi Jinping came out of the 19th Congress of the Chinese Communist Party stronger than ever. Elevated to the same level as Mao Zedong, the president of the Republic of China has been given more power than any of his contemporary predecessors and with no one in its close committee potentially qualified to replace him in five years. With Xi having a history of stalling reform, we may see the implementation of short term stimulus, as opposed to long term structural reforms, continue. This should be positive for Chinese equities as the country focuses on sustainable growth, attracting foreign investment and remaining the largest consumers of commodities to meet the need of its economy and population. The outcome has initially been positively received as the MSCI China Index gained 8% one month following the Congress before declining recently as Chinese economic activities continue to show signs of a mild slowdown.
The above chart shows that China CAPE ratio currently stands above its historical level, suggesting that Chinese equities are overvalued. However, the surge of the MSCI China Index price level has been the main driver of the increase in the CAPE ratio. The index real earnings per share have been below its historical average over the past two years but are gradually recovering toward its mean since the beginning of the year. This picture combined with the potential decade length investiture of the “Strongman” suggests further potential upside for Chinese equities in the medium term.
Non-resident capital inflows in EM, mainly China, reached a bottom in 2015, according to the IMF, on concerns over the impact the US taper tantrum could have on EM asset prices and the potential depreciation of the Yuan. Inflows have revived since but is still half of the volume seen at its peak in Q1 2013. The recovery of investor sentiment regarding the global economy should see capital inflows in EM assets increase further in 2018.
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General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
En börshandlad fond för kinesiska large cap aktier
När aktiekurserna i de utvecklade ekonomierna ligger på sina högsta nivåer på ungefär tre år överväger vissa investerare alternativ. En marknad som flera väljer att titta på är Kina, världens största emerging market. iShares China Large Cap ETF (NYSEArca: FXI), en av de största kinafokuserade börshandlade fonderna. FXI är en börshandlad fond för kinesiska large cap aktier som har utvecklats väl under 2017.
Löpande reformer, särskilt från utbudssidan, kan ytterligare stödja den kinesiska ekonomiska tillväxten. Reformer har stärkt industrins lönsamhet och stärkt råvarupriserna. Kinas exportörer åtnjuter också förbättringar från en återhämtning i den globala handeln.
En stabil och konsekvent tillväxt
Investerare kommer att ta hand om det faktum att Kinas ekonomiska tillväxt inte är vad den var under de senaste rusningarna för tillväxtmarknaderna. För en ekonomi som ofta anses vara för het, kan en stabil och konsekvent tillväxt vara vad utländska investerare verkligen vill se.
Den kinesiska ekonomin växlar över mot inhemsk konsumtion som en viktig tillväxtdrivare. Följaktligen blir konsumtionsdrivna sektorer som teknik och tjänster växande faktorer i den kinesiska ekonomin.
Mätt i dollar har FXI haft en genomsnittlig årlig avkastning på 8,62% sedan starten. Eftersom Kinabara varit igång över en börskrasch 2015, har den genomsnittliga årliga avkastningen under de senaste 3 och 5 åren bara varit 4,78% respektive 5,82%. Däremot tycks aktiemarknaden visa några tecken på återhämtning på senare tid med en avkastning på 18,91% under det senaste året.
Få aktier
FXI kritiseras ofta eftersom denna börshandlade fond bara innehar 51 aktier. Den allokerar dessutom 53 proent av sin vikt till finansiella tjänster, nästan fem gånger den näst största sektorns vikt.
Yuanens svaghet har varit en invändning för investerare som beaktar Kina. Det scenariot kan förändras till det bättre. Den kinesiska valutan kommer att stärkas när yuanen går in i Internationella valutafondens korg av reservervalutor, eftersom den går samman med i dollar, euro, pund och yen.
Med vikten av att yuanen tillväxt som ett alternativ till den amerikanska dollarn kan investeringsflöden till Kina hjälpa till att stödja de kinesiska marknader och landsspecifika börshandlade fonder.
FXI är ett utmärkt investeringsinstrument för placerare som vill investera på den största tillväxtmarknaden i världen. När man jämför Kina med S & P500 är FXI relativt billigt. Även om detta kan innebära en potential för högre avkastning, måste investerarna vara medvetna om den kinesiska marknadens stora volatilitet och de risker som är förknippade med Kina. Investerare bör vara försiktiga och undvika att jaga marknaden.
iShares China Large-Cap (NYSEArca: FXI)
Denna ETF replikerar investeringsresultaten av FTSE China 50 Index, ett index som består av kinesiska large cap aktier som handlas på Hongkongbörsen. Den här börshandlade fonden investerar i allmänhet åtminstone 90 % av sina tillgångar i värdepapper i det underliggande indexet och i depåbevis som representerar värdepapper i det underliggande indexet. Indexet är utformat för att följa utvecklingen av de största företagen på den kinesiska aktiemarknaden som är tillgängliga för internationella investerare. Fonden är icke-diversifierad.
China congress to potentially weigh on metal prices
ETF Securities Weekly Flows Analysis – China congress to potentially weigh on metal prices
Highlights
Precious metals ETPs recorded US$155mn inflows driven by inflows into gold, platinum and the basket ETPs.
Inflows into disruptive technology ETPs continue to grow on attractive valuation of the ROBO Global® Robotics and Automation UCITS Index compared to the MSCI World Technology Index.
Investors favoured exposure to the Eurozone to specific European countries as Brexit negotiations face a deadlock, increasing the uncertainty over the future relationship between the UK and EU.
Gold ETPs recorded inflows for the second consecutive week as the Chinese market reopened. Last week saw the price of gold rising to nearly US$1,300/oz after falling 6.3% from its 12-month high in early September. This could be a transitory recovery as the prospect of a rate hike and a stronger US Dollar is likely to weigh further on gold prices in the near term. We see the price of gold at US$1260/oz by year end. China auto sales rose by 3.3% year-over-year to September, benefitting platinum group metals. Platinumand palladiumrose respectively 3.3% and 5.6% last week. Investors injected US$12.5mn into platinum ETPs as platinum ended last week at US$55/oz discount to palladium. The price of platinum has also been lagging the price of gold so far this year, rising by 4.8% versus 13.4% for gold year-to-date. We continue to believe in the potential catch-up of platinum in the near term.
Industrial metals saw inflows of US$16.5m as prices reached a 3-year high. The Bloomberg Industrial Metals Index has gained 23% since the beginning of the year, and 2.6% over the past week, reaching the highest level since the end of 2014. Flows into industrial metal ETPs have been choppy since the end of August, with large outflows recorded in September as prices declined 5% from the peak. Prices bounced back again in October despite Chinese markets being closed during the first week of the month. Inflows last week went mainly into the basket ETPs (US$22.8mn) and copper (US$5.9mn) while other industrial metal ETPs recording outflows. The China congress on Wednesday could put downward pressure on metal prices although market participants have been pricing it as a non-event so far.
Robotics and Cyber security ETPs continued to see steady inflows last week with US$23mn in the Robotic ETP and US$2mn in the Cybersecurity ETP. Our model shows that the ROBO Global® Robotics and Automation UCITS Index currently trades at a discount to the MSCI World Technology Index while the ISE Cyber Security® UCITS Index Net Total Return trades at a slightly higher level compared to its historical average, indicating that the Robotic ETP has higher upside potential.
European ETPs saw inflows of US$6.9mn mostly in short ETPs. Investors have increased their short exposure to individual European countries (France, UK and Germany) by US$8.4mn whilst increasing their exposure to the region at the same time with US$2.1mn into long EuroSTOXX ETPs. Investors appear somewhat polarised, the negotiations on the future relationship between the UK and the EU being in a deadlock as no agreement on the divorce bill has been reached.
Video Presentation
Edith Southammakosane, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.
For more information contact
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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Italy: When being made within Italy, this communication is for the exclusive use of the ”qualified investors” and its circulation among the public is prohibited.
Switzerland: In Switzerland, this communication is only intended for Regulated Qualified Investors.
US: This communication is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares in the United States or any province or territory thereof, where none of the Issuers, the Company or any securities issued by them are authorised or registered for distribution and where no prospectus for any of the Issuers or the Company has been filed with any securities commission or regulatory authority. Neither this communication nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. Neither the Issuers, the Company nor any securities issued by them have been or will be registered under the United States Securities Act of 1933 or the Investment Company Act of 1940 or qualified under any applicable state securities statutes.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. ETFS UK does not warrant or guarantee the accuracy or correctness of any information contained herein and any opinions related to product or market activity may change. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data.
Any historical performance included in this communication may be based on back testing. Back tested performance is purely hypothetical and is provided in this communication solely for informational purposes. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Historical performance is not an indication of or a guide to future performance.
The information contained in this communication is neither an offer for sale nor a solicitation of an offer to buy securities nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchaser or sale would be unlawful under the securities law of such jurisdiction. This communication should not be used as the basis for any investment decision.
ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
Risk Warnings
Securities issued by the Issuers and the Company may be structured products involving a significant degree of risk and may not be suitable for all types of investor. This communication is aimed at sophisticated, professional and institutional investors. Any decision to invest should be based on the information contained in the prospectus (and any supplements thereto) of the relevant Issuer or the Company which includes, inter alia, information on certain risks associated with an investment. The price of any securities may go up or down and an investor may not get back the amount invested. Securities may be priced in US Dollars, Euros, or Sterling, and the value of the investment in other currencies will be affected by exchange rate movements. Investments in the securities of the Issuers or the shares of the Company which provide a short and/or leveraged exposure are only suitable for sophisticated, professional and institutional investors who understand leveraged and compounded daily returns and are willing to magnify potential losses by comparison to investments which do not incorporate these strategies. Over periods of greater than one day, investments with a short and/or leveraged exposure do not necessarily provide investors with a return equivalent to a return from the unleveraged long or unleveraged short investments multiplied by the relevant leverage factor.
Investors should refer to the section entitled ”Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuers and the Company.
The relevant prospectus for each Issuer and the Company may be obtained from www.etfsecurities.com. Please contact ETFS UK at +44 20 7448 4330 or info@etfsecurities.com for more information.
Issuers
General: The FCA has delivered to the regulators listed below certificates of approval attesting that the prospectuses of the Issuers indicated have been drawn up in accordance with Directive 2003/71/EC.
For Dutch, French, German and Italian Investors: The prospectuses (and any supplements thereto) for each of the Issuers (apart from SCSL) have been passported from the United Kingdom into France, Germany, Italy and the Netherlands and have been filed with the l’Autorité des Marchés Financiers (AMF) in France, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in Germany, CONSOB and the Bank of Italy in Italy and the Authority Financial Markets (Autoriteit Financiële Markten) in the Netherlands. Copies of prospectuses (and any supplements thereto) and related regulatory documentation, including annual reports, can be obtained in France from HSBC France, 103, Avenue des Champs Elysées, 75008 Paris, in Germany from HSBC Trinkhaus & Burkhardt, AG, Konsortialgeschäft, Königsalle 21/23, 40212 Dusseldorf and in the Netherlands from Fortis Bank (Nederland) N.V., Rokin 55, 1012 KK Amsterdam. The prospectuses (and any supplements thereto) for each of the Issuers (apart from SCSL) may be distributed to investors in France, Germany, Italy and the Netherlands.
This communication is not a financial analysis pursuant to Section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and consequently does not meet all legal requirements to warrant the objectivity of a financial analysis and is also not subject to the ban on trading prior to the publication of a financial analysis.
This communication is not addressed to or intended directly or indirectly, to (a) any persons who do not qualify as qualified investors (gekwalificeerde beleggers) within the meaning of section 1:1 of the Dutch Financial Supervision Act as amended from time to time; and/or (b) in circumstances where other exemptions or dispensations from the prohibition the Dutch Financial Supervision Act or the Exemption Regulation of the Act on Financial Supervision apply.
None of the Issuers is required to have a license pursuant to the Dutch Financial Supervision Act as it is exempt from any licensing requirements and is not regulated by the Netherlands Authority for the Financial Markets and consequently no prudential and conduct of business supervision will be exercised.
For Austrian, Danish, Finnish, Portuguese, Spanish and Swedish Investors: The prospectuses (and any supplements thereto) for each of CSL, HCSL, HMSL, MSL, ESL and FXL have been passported from the United Kingdom into Austria, Denmark, Finland, Portugal, Spain, Sweden and have been filed with Österreichische Finanzmarktaufsicht (Austrian Financial Market Authority) in Austria, Finanstilsynet (Financial Supervisory Authority) in Denmark, Finanssivalvonta (Finnish Financial Supervisory Authority) in Finland, Comissão do Mercado de Valores Mobiliários (Portuguese Securities Market Commission) in Portugal, Comisión Nacional del Mercado de Valores (Securities Market Commission) in Spain and the Finansinspektionen (Financial Supervisory Authority) in Sweden. The prospectuses (and any supplements thereto) for these entities may be distributed to investors in Austria, Finland, Portugal, Spain, Denmark and Sweden.
For Belgian Investors: The prospectuses (and any supplements thereto) for GBS, CSL, MSL and FXL have been passported from the United Kingdom into Belgium and has been filed with the Commission Bancair, Financiére et des Assurances in Belgium. The prospectuses (and any supplements thereto) for GBS, CSL, MSL and FXL may be distributed to investors in Belgium.
For Swiss investors: The prospectus (and any supplements thereto) for SCSL may be distributed to investors in Switzerland. Securities in SCSL are not shares or units in collective investment schemes within the meaning of CISA. They have not been approved by the Swiss Financial Market Supervisory Authority (FINMA) and are not subject to its supervision. The Swiss Franc Currency-Hedged Commodity Securities are not issued or guaranteed by a supervised financial intermediary within the meaning of CISA.
This document does not constitute a prospectus under the Companies (Jersey) Law 1991 and is not an offer or an invitation to acquire securities in SCSL. This document does not constitute a Swiss listing prospectus under the SIX Listing Rules and the SIX Additional Rules for the listing of Exchange Traded Products. This document must be read in conjunction with the Swiss Listing Prospectus. If there is any inconsistency between this document and the Swiss Listing Prospectus, the Swiss Listing Prospectus shall prevail. Detailed information on the terms and conditions of the Swiss Franc Currency-Hedged Commodity Securities can be found in the Swiss Listing Prospectus under Part 6 – Trust Instrument and Swiss Franc Currency-Hedged Commodity Securities.
Other than as set out above investors may contact ETFS UK at +44 (0)20 7448 4330 or at info@etfsecurities.com to obtain copies of prospectuses and related regulatory documentation, including annual reports. Other than as separately indicated, this communication is being made on a ”private placement” basis and is intended solely for the professional / institutional recipient to which it is delivered.
Securities issued by the Issuers are direct, limited recourse obligations of the relevant Issuer alone and are not obligations of or guaranteed by any of UBS AG (”UBS”), Merrill Lynch Commodities Inc. (”MLCI”), Merrill Lynch International (”MLI”), Bank of America Corporation (”BAC”), Bloomberg Finance LP (”Bloomberg”), Société Générale (”SG ”), Shell Trading Switzerland, Shell Treasury, HSBC Bank plc, JP Morgan Chase Bank, N.A., Morgan Stanley & Co International plc, Morgan Stanley & Co. Incorporated or any of their affiliates or anyone else or any of their affiliates. Each of UBS, MLCI, MLI, BAC, Bloomberg, SG, Shell Trading Switzerland, Shell Treasury, HSBC Bank plc, JP Morgan Chase Bank, N.A., Morgan Stanley & Co International plc and Morgan Stanley & Co. Incorporated disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might have in respect of this communication or its contents otherwise arising in connection herewith.
Funds
Austria: Investors should base their investment decision only on the relevant prospectus of the Company, the Key Investor Information Document, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association, which can be obtained free of charge upon request at the Paying and Information Agent in Austria, Erste Bank der oesterreichischen Sparkassen AG, Graben 21, A1010 Wien, Österreich and on www.etfsecurities.com.
France: Any subscription for shares of the Funds will be made on the basis of the terms of the prospectus, the simplified prospectus and any supplements or addenda thereto. The Company is a UCITS governed by Irish legislation and approved by the Financial Regulator as UCITS compliant with European regulations although may not have to comply with the same rules as those applicable to a similar product approved in France. Certain of the Funds have been registered for marketing in France by the Authority Financial Markets (Autorité des Marchés Financiers) and may be distributed to investors in France. Copies of all documents (i.e. the prospectus (including any supplements or addenda thereto, the Key Investor Information Document, the latest annual reports and the memorandum of incorporation and articles of association) are available in France, free of charge, at the French Centralizing Agent, Société Générale, Securities Services, at 1-5 rue du Débarcadère, 92700 Colombes – France. Germany: The offering of the Shares of the Fund has been notified to the German Financial Services Supervisory Authority (BaFin) in accordance with section 310 of the German Investment Code (KAGB). Copies of all documents (i.e. the Key Investor Information Document (in the German language), the prospectus, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association) can be obtained free of charge upon request at the Paying and Information Agent in Germany, HSBC Trinkaus & Burkhardt AG, Königsallee 21-23, 40212 Düsseldorf and on www.etfsecurities.com. The current offering and redemption prices as well as the net asset value and possible notifications of the investors can also be requested free of charge at the same address. In Germany the Shares will be settled as co-owner shares in a Global Bearer certificate issued by Clearstream Banking AG. This type of settlement only occurs in Germany because there is no direct link between the English and German clearing and settlement systems CREST and Clearstream. For this reason the ISIN used for trading of the Shares in Germany differs from the ISIN used in other countries.
Netherlands: Each Fund has been registered with the Netherlands Authority for the Financial Markets following the UCITS passport-procedure pursuant to section 2:72 of the Dutch Financial Supervision Act.
United Kingdom: Each Fund is a recognised scheme under section 264 of the Financial Services and Markets Act 2000 and so the prospectus may be distributed to investors in the United Kingdom. Copies of all documents (i.e. the Key Investor Information Document, the prospectus, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association) are available in the United Kingdom from www.etfsecurities.com.
None of the index providers of the Funds referred to herein nor their licensors make any warranty or representation whatsoever either as to the results obtained from use of the relevant indices and/or the figures at which such indices stand at any particular day or otherwise. None of the index providers shall be liable to any person for any errors or significant delays in the relevant indices nor shall be under any obligation to advise any person of any error or significant delay therein.
