US elections – control of Congress is crucial for risk assets
The most positive outcome for equities in the US elections would be a Clinton win coupled with her having a majority in at least one chamber. No control over Congress and/or a change of the party controlling the presidency substantially increases volatility in equities.
There are many different ways to cut the US election in relation to equity performance. We have looked at all 22 US elections since 1928 analysing both goldand equities prior to and a year after each election.
Now that the chances of a Trumpwin are looking increasingly remote, the nature of a Clinton win is the most important aspect to focus on in this election. Our analysis highlights that a situation in which the sitting president has no control of either the House or the Senate, has historically created a very volatile environment for equities. Political uncertainty and and inability to push through promised reforms take their toll on market confidence and within one quarter equities have typically sold-off by 7.6%.
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There is a risk that we may be putting too much trust in the pollsters; it is difficult to discount anything in the US elections given the pollsters’ difficulty in capturing populist waves. Markets are currently assuming a Clinton victory, therefore a Trump win would be very detrimental to risk assets. We can’t wholly quantify just how much negative impact a Trump win would be, but a change in the party controlling the presidency (Republicans to Democrats or vice-versa) has also led to equity market sell-offs very similar to those where the sitting President has no control of Congress.
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Furthermore, this is when gold is most effective in being an event risk hedge.
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Although in a situation where the incumbent party wins and has control of Congress, or partial control at least, gold has historically sold off. We continue to expect gold price weakness in the near-term, although continued European political instability in 2017 is a key factor that will maintain investor appetite for gold.
James Butterfill, Head of Research & Investment Strategy at ETF Securities
James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.
James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.
Fixed Income Research – Has the bond bull market moved ahead of itself?
Highlights
We have identified four major risks that could cause the bond bull trend to reverse: (1) an unexpected acceleration of growth rates and inflation (2) unsustainable debt trends; (3) credit demand and investment pick up; (4) an acceleration of China’s economic growth.
We see these risks contained in the near term. Therefore, we believe that although many investors yearn for a return to “normality,” we are not there yet.
The mixed economic outlook should allow bonds to keep trading in a broad range albeit with a high degree of volatility.
Is the 30-year bond bull market over?
After decades of declining interest rates and with the Fed on the cusp of raising rates (50% chance for December based on fed funds futures, as of September 28th), many investors wonder when the bull trend on the bonds market will reverse. While the economic data remains bond-bearish, the jump in global yields in early September raises the question of whether the bond market has moved ahead of itself.
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On September 8th, the global bond market started to sell-off after the ECB kept its policy unchanged and failed to suggest any QE expansion beyond March 2017, and after Fed officials made hawkish comments ahead of their meeting scheduled later in the month. G10 long-dated bond yields rose by an average of 10 to 15bps and volatility moved higher – the VIX index edged up from 12 to 20. Additionally, credit spreads widened significantly especially for US and European High yield bonds (by 18 and 8bps respectively), while the emerging market (EM) government bond market proved resilient – credit spreads widened by only 3bps. Since then, global yields and volatility have declined after the Fed voted to hold any rate hike due to mixed macroeconomic data.
Beyond monetary policy, other factors can be important catalysts for a bond market crash. We have identified four main risk factors on which investors should focus on. Unless there is a reason to believe that central banks are seriously behind the curve or that there is a material change in at least one of the four risk factors below, the bond market should be broadly stable.
Risk 1: Inflation, growth rate and monetary policy
The global bond market is primarily affected by monetary policy. If growth and inflation rates begin to pick up, central banks might allow inflation to overshoot their targets to a certain extent before promptly removing monetary accommodation and increasing the pace of rate hikes, which would lead to a severe repricing higher of yields.
However, the current outlook suggests otherwise. According to the OECD, the global economy is projected to grow at a slower pace this year than in 2015, with only a modest uptick expected in 2017. In the US, where the economic recovery is the most advanced, the FOMC median economic projections for growth and inflation for 2016 were revised downward in September, from 2.0% to 1.8% and from 1.4% to 1.3% respectively. In addition, inflation and markets-based inflation expectations are persistently below the Fed’s 2% inflation target, with only modest signs of rising. The yield difference between regular 10-year Treasury notes and 10-year Treasury Inflation Protected Securities (a gauge of market’s long term inflation expectations) is at 1.54%, as of September 28th.
Risk 2: Fiscal sustainability and uncertainty
With the range of monetary policy tools nearing exhaustion, central bankers have been urging governments to provide fiscal stimulus and implement structural reforms in order to stimulate growth. Although, according to the IMF, fiscal positions have worsened significantly with public debt to GDP ratios being revised upwards in most countries (greater than 100% of GDP on average). The anaemic growth exacerbates the debt overhang problem. A further increase of debt to GDP ratio without a sustained increase of growth will raise concerns about the sustainability of public debt. In turn, this would likely have a material impact on investors’ perception of risk, raising sovereign risk premiums and, leading them to cut duration by reducing long-term bond positions. During the Eurozone debt-crisis in 2010, long-term Eurozone government bond yields rose from 2% to above 6% in countries where investors had serious doubt about the credit-worthiness of the government.
In addition, political choices also play an important role for fiscal policies. For instance, the nonpartisan Committee for a Responsible Federal Budget published a report on September 26th showing that Trump’s agenda, if enacted, would push the federal debt-to-GDP ratio from its current level of 75% to 105% within the next decade, while his rival Clinton would increase the ratio to 86%.
However, most advanced countries are constrained by strict budget rules, ensuring that future fiscal plans are sustainable. We thus see the fiscal risk contained in the near term.
Risk 3: Credit demand and investment
The Federal Reserve of San Francisco in its September Economic Letter1, highlighted the divergence between real interest rates and real returns on capital. The authors found that the recovery in credit markets following the Great Recession has been slower than the previous recovery, resulting in a slow recovery of growth and investment.
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1 “Slow Credit Recovery and Excess Returns on Capital”, FRBSF Economic Letter (September 26th, 2016)
As a result, only the projects with a high probability of high return are funded, limiting the number of investment
opportunities and keeping interest rates low. While credit demand and investment dynamics remain subdued, any acceleration of these two indicators could be the start of a bond rout.
Risk 4: International capital flows
Bond performance since the early 2000s has been strongly correlated to the increase of central banks’ foreign currency (FX) reserves, in particular in EM and China.
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Since the Fed started to taper its asset purchase programme in 2014, the US dollar has strengthened while the Yuan weakened. Consequently, the People’s Bank of China (PBOC) sold approximately 20% (USD808bn) of its foreign-currencies holdings to maintain the Yuan’s value and limit capital outflows, before finally devaluing its currency in January 2015. The PBOC’s bond sale was more than offset by the capital outflows from China into safe heaven assets, which resulted in lower global bond yields. In the meantime, G10 central banks have intensified their quantitative easing programmes, which has also contributed to lowering global bond yields. In our opinion, if China’s growth rate accelerates, foreign capital flows from developed markets could rapidly resume and exert upward pressures on global yields. However, current data suggest that the excess capacity in China will only enable the economic growth rate to stabilise.
Although we see four risks that could derail the current stability of the bond market, the mixed economic outlook should allow bonds to keep trading in a broad range albeit with a high degree of volatility. We believe that good quality corporates credit and EM markets with sound fundamentals can continue to provide decent yield differentials while being more resilient in time of market stress.
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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The analyses in the above tables are purely for information purposes. They do not reflect the performance of any ETF Securities’ products . The futures and roll returns are not necessarily investable.
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Efter den politiska debatten mellan Hillary Clinton och Donald Trump var det många som ansåg att Clinton vann debatten mot Donald Trump, men den stora vinnaren visade sig vara de börshandlade fonder som ger placerarna exponering mot tillväxtmarknaderna.
Emerging markets, ofta kallat tillväxtmarknader, särskilt Mexikooch Indonesien, var bland vinnarna efter måndagens politiska debatt eftersom många investerare tror att om Hillary Clinton vinner presidentvalet så kommer det att vara gynnsamt för USAs utländska handelsförbindelser. Att Clinton vann debatten mot Donald Trump var således en lättnad för dessa länder.
Trump har uppvisat stark protektionistiska retorik när det gäller internClinton vann debatten mot Donald Trumpationell handel, och har sagt att han skall omförhandla vissa handelsavtal i hans ”America First” plattform. Följaktligen kommer många tillväxtekonomier, särskilt de som är involverade i partnerskapet Trans-Pacific, att drabbas hårt under en Trump administration fokuserade på att skydda amerikansk industri.
Mexiko och Stilla Havsekonomierna vinnare
Clinton vann debatten mot Donald Trump, något som gynnade aktiemarknaderna i Stilla Havsekonomierna, och därmed också de börshandlade fonder som ger exponering mot dessa marknader. Bland dessa börshandlade fonder kan nämnas ETFer som iShares MSCI Indonesia ETF (NYSEArca: EIDO) och Market Vectors Indonesia Index ETF (NYSEArca: IDX) som ger placerarna exponering mot börsen i Indonesien.
ETF-investerarna har även kunnat se hur andra börshandlade fonder med focus på de växande ekonomierna i Asien steg, till exempel Global X FTSE Asean 40 ETF (NYSEArca: ASEA), SPDR S & P Emerging Asia Pacific ETF (NYSEArca: GMF) och iShares MSCI Emerging Markets Asia ETF (NYSEArca: EEMA). ASEA ger placerarna en exponering mot de sydostasiatiska ekonomierna och har en allokerat sitt kapital till Singapore32,1%, Malaysia 25,5%, Indonesien19,8%, Thailand14,7% och Filippinerna7,9%. GMF är en liknande ETF som fördelat sina innehav på Kina 44,2%, Taiwan21,5%, Indien17,7%, Malaysia4,5%, Thailand 4,6%, Indonesien 4,3% och Filippinerna 2,5%.
EEMA ger också Asia Pacific exponering, och kategoriserar till skillnad från MSCI Sydkorea som en tillväxtekonomi. Länders vikter inkluderar Kina 37,4%, Sydkorea 20,5%, Taiwan 16,9%, Indien 11,9%, Malaysia 3,7%, Indonesien 3,8%, Thailand 3,1% och Filippinerna 1,9%.
Trump ifrågasätter NAFTA
Den republikanska kandidaten Trump ifrågasätter NAFTA och frihandel, och har därför lovat att han skall belägga import från Mexiko med skyddstullar. Han vill också bygga en mur vid gränsen mellan USA och Mexiko (men inte betala för den). Syftet är att hålla de mexikanska invånarna utanför USAs gränser. Detta har bland annat lett till prissvängningar i den mexikanska peson under de senaste månaderna. Den mexikanska peson ansågs innan debatten att vara en av de mest undervärderade valutor på tillväxtmarknaderna. Den mexikanska peson har också kommit att fungera som en proxy för en seger för Donald Trump i det amerikanska presidentvalet. Innan den politiska debatten handlades den mexikanska peson på en rekordlåg nivå mot dollarn. Den stärktes emellertid kraftigt efter debatten.
Mexiko som ETF-alternativ
ETF investerare kan också få exponering mot den mexikanska aktiemarknaden genom iShares MSCI Mexico Capped ETF (NYSEArca: EWW),som håller ett brett spektrum av företag i Mexiko, och SPDR MSCI Mexico Quality Mix ETF (NYSEArca: QMEX), som spårar en mer anpassad korg av mexikanska aktier som valts ut baserat på faktorer som värde, kvalitet och låg volatilitet. Eftersom dessa två ETFer inte säkra valutarisken, skulle en starkare peso ytterligare stärka avkastningen för den som köper dessa EWWeller QMEX. En starkare peso skulle ge till högre avkastning i amerikanska dollar som är den valuta som dessa två börshandlade fonder noteras i.
iShares MSCI Mexico Capped (NYSEArca: EWW)
Denna ETF har som mål att replikera investeringsresultat från MSCI Mexico Invest Market Index (IMI) 25/50. Den börshandlade fonden kommer alltid att investera minst 80 procent av sina tillgångar i värdepapper i dess underliggande index och i depåbevis som representerar värdepapper i dess underliggande index. MSCI Mexico Invest Market Index (IMI) 25/50 är ett free float-justerat marknadsvärdesviktat index med en skyddande metod som tillämpas för att emittenten vikter så att ingen enskild aktie kan ha en vikt som överstiger 25% av det underliggande indexet, och alla emittenter med vikt på över fem (5) begränsas så att de inte kan ha en kumulativt vikt som överstiger 50 procent av portföljvärdet.
Market Review – Gold Extends its Strength in April
The gold market has moved from a position of strength to one of even greater strength. The gold price entered a consolidation in March but never traded below $1,200 per ounce. Late in April the gold price broke out of its consolidating pattern to reach its 2016 high of $1,296 per ounce and ended April at $1,292.99 per ounce for a gain of $60.28 (4.9%). On May 2 gold traded above $1,300 per ounce for the first time since January 2015. We believe that an increasing sense of financial risk and U.S. dollar weakness are driving investment demand for gold. When commenting on the global economy in a Bloomberg interview on April 5, International Monetary Fund (IMF) President Lagarde indicated that downside risks have increased and “we don’t see much by way of upside.” Gold moved to its high for the month following the Commerce Department’s April 28 release of weaker-than-expected first quarter U.S. GDP growth of just 0.5% annualized. Markets seemed confounded by the strength exhibited by the Japanese Yen (JPY) and the Euro (EUR), despite negative rate policies in both regions. As a result, the U.S. Dollar Index (DXY)1 declined 1.7% in April and fell to a 15-month low on May 2.
This year’s bull market in precious metals gained in breadth as silver kicked into gear in April. Like gold, silver is a monetary metal but it had been lagging gold’s performance. In fact, the gold/silver ratio reached a long-term high of 83.2 on March 1. Strong inflows into silver bullion exchange traded products (ETPs) in March and April enabled silver’s year-to-date performance to surpass gold on April 14. For the year, silver is up 28.7%, while gold has gained 21.9% and the gold/silver ratio ended the month at 72.4. We regard silver as a leveraged proxy for gold and wouldn’t be surprised to see the gold/silver ratio continue to fall further towards its long-term average of around 60.
Another sign of the strength of the current market is the performance of gold stocks. On April 8 the NYSE Arca Gold Miners Index (GDMNTR)2 surpassed its previous high for the year and never looked back, advancing 28.1% in April. Many of the larger producers announced favorable first quarter results in April, which boosted the performance of gold equities.
Our patience was tested in the first quarter by the underperformance of many junior producers and developers. The junior gold stocks had been lagging but our perseverance has appeared to pay off. The MVIS Global Junior Gold Miners Index (MVGDXJTR)3 gained 36.8% in April and had lagged the GDMNTR until April 8 but is now outperforming the GDMNTR by 11.7% for the year. The MVGDXJTR caught up with the GDMNTR for the year by outperforming in March with an 8.6% gain.
Market Outlook
We identified several reasons for this year’s spectacular rise in gold stocks, which has caused gold stocks (GDMNTR) to gain 87.4% and the juniors (MVGDXJTR) to gain 99.1% year-to-date:
• Positive changes in sentiment and investment demand for gold.
• Companies have successfully slashed costs, cut debt, gained efficiencies, and generated cash.
• Mean reversion in a sector that had been oversold during the worst bear market in history.
• Elimination of short selling pressure that had been weighing on gold and gold stocks since they crashed in 2013.
• Limited liquidity in a relatively small sector with a global market cap of just $260 billion.
These heady gains suggest to us that gold stocks have become overbought. We expect there will probably be a correction at some point this year. Seasonal patterns have been absent in the gold market for the past several years, possibly due to the overwhelming selling pressure that prevailed. Without such intense selling, we may again see seasonal patterns from Asia and India lead to some weakness in the summer months but strengthening in the fall and extending into the new year. We remain cognizant that GDMNTR is still down 61% from its 2011 highs, which translates to a 159% gain needed to return to 2011 levels. The gold price was much higher in 2011 as well, topping at $1,921 per ounce, but we think the earnings power of the gold sector is greater now than it was back then. We estimate that a $100 (roughly 8%) move in the gold price from $1,300 to $1,400 per ounce would result in a 38% increase in free cash flow for the majors in our research universe, while the mid-tier producers would see a 68% increase in free cash.
The $217 per ounce (23%) increase in the gold price since the U.S. Federal Reserve (the “Fed”) hiked interest rates in mid-December wasn’t caused by a crash or panic in the financial markets. There hasn’t been a systemic crisis and in fact, global conditions today aren’t that different than six months ago when gold struggled near its lows. In our view, the fundamental change that has enabled gold to perform well since the Fed’s rate announcement is a change in investors’ view of central banks. The U.S. dollar has weakened mainly because the market no longer anticipates a series of Fed rate increases. Investors are realizing that central bank policies lack efficacy and have run their course without accomplishing their intended results. In general, central banks appear to be rapidly running out of options to help stimulate economies. In fact, rather than helping, quantitative easing, zero rates, and negative rates have created distortions in capital allocation, leading to the mispricing of assets and currencies, wealth inequality, and possibly other harmful, unintended consequences on the financial system.
We think the solution to most of the world’s problems hinges on re-establishing robust economic growth. A major reason that central bank policies haven’t been able to foster as much growth as desired is that fiscal and regulatory policies are working against them. Governments around the world have increased debt to unheard of levels to raise capital to spend on projects, programs, and entitlements that generate a fraction of the jobs and growth that the same capital may have generated through private sector channels.
The popular perception that the banks were responsible for the subprime crisis has resulted in fines and regulatory burdens that hamper the formation of capital at the center of the financial system. The “wolf” character in the 2013 movie “The Wolf of Wall Street” ran a boiler room on Long Island that was unrelated to investment banks on Wall Street. The 2015 film “The Big Short,” an Academy Award nominee for Best Motion Picture, puts the blame for the financial crisis squarely on the banks. It makes barely any mention of the Government Sponsored Enterprises’ (GSEs such as Fannie Mae and Freddie Mac4) role in sponsoring subprime loans or the long-running government policies under the Clinton and Bush Administrations that enabled high risk borrowers to own homes despite their inability to service a mortgage. The tone was set in 2009 when President Obama labeled bankers as “fat cats.” While banks certainly played a part, the government played the lead, in our opinion. Unfortunately, these misperceptions and misplaced blame have guided policy, leading to a financial system that is probably weaker than it was before the crisis. We believe that the economy is clearly weaker.
In addition, regulations that burden the private sector have also increased. According to The Wall Street Journal, the Obama Administration is on track to issue 439 major regulations in its 8 years in office, more than the Bush Administration’s 358 or Clinton’s 361. Heaping on more and more regulations only serves to stifle business formation, profitability, and innovation.
A similar tipping point has been reached with tax policies. Some companies have been re-domiciling away from the United States to avoid tax rates that are among the highest in the world. Instead of revising and simplifying the tax code to address the problem, the U.S. Treasury implemented new regulations that force U.S. corporations to remain in the U.S., placing them at a disadvantage to their global peers.
How often do we see leaders in government promote policies that help make business more productive, efficient, or profitable? As to where we are heading, we look to possibly the most monolithic governmental institution in the world. An article published in The Wall Street Journal and written by a retiring United Nations (“UN”) assistant secretary general for field support articulated a sentiment worth sharing. After relocating to the New York headquarters of the UN, he became disheartened, remarking: “If you lock a team of evil geniuses in a laboratory, they could not design a bureaucracy so maddeningly complex, requiring so much effort but in the end incapable of delivering the intended result. The system is a black hole into which disappear countless tax dollars and human aspirations, never to be seen again.”
We believe this is the sentiment that gold investors feel when they see central banks resort to more radical monetary policies in an attempt to spur economies bogged down by taxes, regulations, and bureaucracy. Moreover, there are social policies that incentivize people not to work and foreign policies that have resulted in chaos. The investment demand evidenced by the strong inflows into the bullion ETPs this year suggests that many investors are making a strategic investment in gold to diversify and prepare their portfolios for the uncertainty of a financial system that may become increasingly dysfunctional.
by Joe Foster, Portfolio Manager and Strategist
With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster is Portfolio Manager and Strategist for the Gold and Precious Metals strategy.
Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time.
Important Information For Foreign Investors
This document does not constitute an offering or invitation to invest or acquire financial instruments. The use of this material is for general information purposes.
Please note that Van Eck Securities Corporation offers actively managed and passively managed investment products that invest in the asset class(es) included in this material. Gold investments can be significantly affected by international economic, monetary and political developments. Gold equities may decline in value due to developments specific to the gold industry, and are subject to interest rate risk and market risk. Investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation.
Please note that Joe Foster is the Portfolio Manager of an actively managed gold strategy.
Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.
1U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc. 2NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 3MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver. 4Fannie Mae (Federal National Mortgage Association); Freddie Mac (Federal Home Loan Mortgage Corporation)
