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Underweight US, Europe and precious metals

ETF Securities Asset Allocation Research: Underweight US, Europe and precious metals

Summary

For October, in the equity space, the tactical portfolio continues to reallocate its weights from developed countries into emerging market stocks.
In the commodity space, we tactically underweight gold, platinum and palladium, increasing allocation across the board to keep commodities at 10% in the portfolio.
Our tactical portfolio has much lower volatility than its strategic benchmark since 2005, returning 5.2% per year and enhancing the Sharpe ratio by 65%.
In this second edition of our asset allocation strategy, we will review the performance of our tactical portfolio compared to its strategic benchmark over the past quarter. We will also detail our tactical positions for October 2016.

October 2016 positioning

The following table highlights how our positions have changed over the past quarter in the tactical portfolio compared to the strategic benchmark. It also shows our positioning for October, based on the output of the aforementioned model recommendations as of end of September 2016.

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While market volatility measured by the VIX index is heading toward its lower band, the equity-bond relative trade model continues to suggest underweighting equities by 1,000bps to 45% for October and overweighting bonds by 1,000bps to 45% as well. If the volatility index continues to decline, the model will likely match the 55/35 split of the strategic benchmark in favour of equities accordingly.

The CAPE model suggests to remain underweight the US, France, the Netherlands, Italy and Denmark. The CAPE of these countries rose by 10% on average since end of June except for Denmark. While at 60% above its 10-years median, Denmark’s CAPE fell 21% over the period. On the other hand, based on the model, Canada, Brazil, Russia and two new countries: Turkey and Singapore should be overweight. Brazil’s CAPE is 54% below its 10-years median and continues to decline while Turkey’s CAPE is 7.1% below its historical median but rose 33% since the end of June.

The CDS model tells the tactical portfolio to remain neutral on all bond components, using the weights set by the benchmark.

The ETFS contrarian model was the most active over the past quarter, overweighting precious metals in July and August before underweighting the sector in September. For October, the commodity model is reducing the weight of gold, platinum and palladium, increasing the weight of lead, cotton and coffee.

As the UK is heading for a hard exit of the European Union, as a rate hike by the Fed is imminent and as China continues on its soft landing, our fundamental-based equity and commodity models are telling us to underweight US stocks, selective European stocks and precious metals in our tactical portfolio, three areas where we see higher risk for near term uncertainty to affect potential returns.

Q3 performance

Whilst underperforming its strategic benchmark in Q3, the tactical portfolio continues to post a much lower level of volatility at 1.3% annualised versus 3.9% for the benchmark, allowing for an increase of the Sharpe ratio by 28% from 0.22 for the benchmark to 0.28 for the tactical portfolio.

A closer look at each asset class shows that commodities and equities were the main contributors to the improved Sharpe ratio of the tactical portfolio compared to its benchmark while bonds contributed to both portfolios in the same way.

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Model performance

The tactical portfolio has the lowest level of volatility compared to the 60/40 and strategic benchmarks, improving the Sharpe ratio by 48% on average.

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Whilst underperforming the 60/40 benchmark, the tactical portfolio outperforms its strategic benchmark by 0.3% per year since January 2005.

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Each asset class in the tactical portfolio also outperforms their equivalent in the strategic benchmark, by 0.3% for equities and bonds and 2.8% for commodities, illustrating the efficiency of our fundamental-based models in improving the risk/return profile of their respective asset class as well as the portfolio.

The tactical portfolio also provides higher protection from the downside risk with a maximum drawdown of -21.6% only compared to -38.5% for the 60/40 and -39% for the strategic benchmark. Finally, the tactical portfolio recovers faster to its previous peak (2 years versus 3.25 years for the benchmarks).

The portfolio methodologies

This section provides a short description of our strategic and tactical portfolio methodologies.
Our strategic benchmark follows a long-only strategy with 60 investments across three asset classes: commodities (25), equities (28) and bonds (7). The initial weights as illustrated below are based on the weighting methodology of:

The Bloomberg Commodity Index for commodities
The MSCI AC World Index for equities
The Barclays bond indices for bonds

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The strategic portfolio represents a balanced portfolio with 55%, 35% and 10% allocated in equities, bonds and commodities respectively. Every month, the strategic portfolio rebalances into the weights set by the above benchmarks.

Our tactical portfolio aims to outperform its strategic benchmark by applying fundamental-based models to reflect our expertise in each asset class and our views of the global economy. The tactical portfolio rebalances every month to a new set of weights determined by the models below:

The equity-bond relative trade model sets the weights at the asset class level between equities and bonds while commodities will remain at 10% all the time
The CAPE model sets the weight for equities
The CDS model sets the weight for bonds
The ETFS contrarian model sets the weight for commodities

Important Information

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.

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.

European domestic and infrastructure-related sectors likely to outperform

ETF Securities Fixed Income Research: European domestic and infrastructure-related sectors likely to outperform

European domestic and infrastructure-related sectors likely to outperform

Summary

Infrastructure-related corporate bond sectors likely to benefit the most from the ECB’s Corporate Sector Purchase Programme (CSPP).
The CSPP will also be particularly supportive for corporate bonds issues from the euro area core.
The ECB’s support for larger firms will likely have a positive impact on growth and employment figures.
ECB’s programme and EU challenges

As widely expected, the ECB left policy rates and the amount of monthly purchases (EUR80bn) unchanged at its June meeting. The Corporate Sector Purchase Programme (CSPP), which started on June 8, is part of the broader EUR80bn monthly purchase. It will include corporate bonds with a maturity from 6 months to 30 years and with a minimum rating of BBB- (i.e. Investment Grade). The national central banks will buy on behalf of the ECB, with the ability to purchase up to 70% of any individual bond.

ECB president, Mr Draghi, has also stressed the need for countries to focus on rising productivity and improving business environment, by enhancing public infrastructure and reducing differences in financing conditions between member states as per Juncker’s “Investment Plan for Europe” announced in November 2014. We believe the CSPP is genuine way to deepen and integrate capital markets in the euro area. Moreover, by including Investment Grade (IG) euro-denominated bonds issued by non-financial corporates (NFCs) to its programme, the ECB is now enlarging its support to larger firms with potential larger impact on growth and employment figures. In this regard, the CSPP is likely to remain in place at least until 2018 or beyond but we don’t expect the ECB to disclose the time frame.

Fundamentals

The economic recovery in the euro area is continuing, albeit with signs of a moderation in growth due to a weaker external environment. In June, the ECB staff revised upward real GDP growth forecast for the euro area to 1.6% in 2016 (up from 1.4% forecast in March), and the annual inflation to 0.2% from 0.1% in March, reflecting the recent oil price rebound.

The fundamentals of European non-financial IG corporates have improved significantly since the beginning of the year, showing a rebound in profitability as well as a downward trend in leverage ratio (from 3x in 2015 to 2.5x in average). The continuing improvement of the economy in the Eurozone should stimulate risk appetite and thus drive European spreads tighter.

Market performance

Our estimate of the amount of eligible CSPP Eurozone corporate bonds outstanding is approximately EUR757.5bn, of which 13% are yielding below zero. In our opinion, the ECB could buy between EUR5bn to EUR10bn monthly, leading the ECB to own between 4.5 – 9% of the current supply by the end of the year.

Euro denominated corporate bonds have outperformed dollar and sterling denominated counterparts so far this year. We expect bonds issued from the core – namely Germany, France and Netherlands – to outperform bonds issued from peripheral countries in the near term since the core countries represent about 70% of the bonds eligible for the CSPP. Since the start of the CSPP, OAS credit spreads on Peripherals IG have widened 4.3bps, while the spread on European HY widened 10.3bps. But as the programme intensifies, investors will rotate more aggressively from Core European IG to Peripherals IG and HY in search for yield. Accordingly, it could be a good entry point into peripheral and HY European corporates.

Sector performance

Since the announcement of the CSPP on March 10, European non-financial corporate bonds (within the BBB rating bracket) tightened by 48bps on average. We believe the CSPP will likely be most beneficial for European Utilities and infrastructure-related sectors. These sectors represent the largest proportion of the bonds eligible for the CSPP (32%), according to our estimates.

The aforementioned sectors have seen a significant improvement of their profitability since the beginning of the year. The profitability of European Utilities and Consumer non-cyclicals sectors has rebounded significantly year-to-date.

In contrast, Energy and Financial corporates experienced declining profitability. Energy sector still remains under pressure due to volatile oil prices. Insurance companies – which are eligible to the CSPP – face asset/liability mismatches as European populations are rapidly aging while the prolonged low yield environment significantly reduced investment income and squeeze margins. Additionally, banks’ net interest income and loan margins are declining as a result of the ECB’s negative deposit facility, and they are excluded from the CSPP. Accordingly, we believe Financial corporates will underperform in the medium term.

Despite improving fundamentals, spreads widened in May and subsequently tightened following the ECB meeting on June 3. The recent tightening more than offset the widening in May for most sectors, with the exception of Utilities, Consumer Staples and Consumer Discretionary where we believe opportunities still remain. Since the Eurozone recovery is mainly domestically driven, we believe domestically focussed sectors such as Consumer Staples, Consumer Discretionary and infrastructure-related will outperform the globally exposed sectors (Energy and Industrials). Furthermore, infrastructure-related sectors appear to be the sectors targeted to increase the growth potential in the euro area.

Moreover, we believe the bulk of opportunities remains in long dated IG European corporate bonds, which have outperformed the short dated bonds so far in 2016. The potential market knock on effect should be a gradual shift in market issuance to longer dated bonds since the programme will likely reduce the cost of funding, together with higher duration risk. However, the ongoing deleveraging of the European corporates’ balance sheet should prevent an unexpected spike in primary market activity.

Conclusion

We believe the CSPP is likely to remain in place until 2018 and the monthly purchases could be increased later this year or early 2017. Thus, we believe opportunities remain in core European BBB credit market, especially in domestic and infrastructure-related sectors as well as in long dated bonds.

Important Information

General

This communication has been provided by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

This communication is only targeted at qualified or professional investors.

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.

Strong Growth to Continue Despite Volatile Markets

Strong Growth to Continue Despite Volatile Markets Deutsche Bank – Synthetic Equity & Index Strategy – Global

ETF Annual Review & Outlook – Strong Growth to Continue Despite Volatile Markets
20 January 2016 (110 pages/ 2400 kb)

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Data in this report is as of 31st December 2015

ETP assets up 8.3% reaching $2.95 trillion in 2015 driven by record inflows

Global ETP industry reached near the $3 trillion mark and closed at $2.95 trillion by the end of 2015. Amid volatile markets last year, ETP assets grew by 8.3% mainly attributable to organic sources (i.e. new money inflows) which made up 13.7%, while prices went negative and eroded 5.5% from overall assets. Year-on-year, organic growth or new money inflows continued to remain strong and provided healthy growth to the ETP industry.

Similar to 2014, global ETP industry once again received healthy inflows in 2015 recording inflows of $373.8bn but this time it is the highest ever flows total for any of the years historically. Flows for US listed ETPs were similar to last year but Europe and Asia listed ETPs saw significant jump in new creations. During the last three years equities have stood as leaders contributing the major portion of the inflows, but since 2014 fixed income ETFs also showed significant signs of growth and contributed $105.4bn in 2015 ($89.4bn in 2014).

The US, Europe, Asia-Pac, and RoW regional ETP assets closed the year at $2.11 trillion (+6.8%), $507.4bn (+10.6%), $250.2bn (+23.8%), and $74.7bn (-7.9%), respectively.

ETP assets likely to reach $3.46 trillion at the end of 2016

We project the industry will continue to grow significantly in 2016 despite potential weak markets. In our base case scenario, assuming a neutral market condition, global ETF assets may grow by 17.8%: broken down into 11.6% or $335bn growth from new flows, and 5.5% from price appreciation. This growth should put the ETF assets well on their way to $3.4 trillion by the end of 2016. We expect the US ETF market to be the major contributor with asset growth of 16.1% and inflows in the vicinity of $230bn. In a bull market case, ETF assets may grow by 29.7% reaching over $3.7 trillion. We expect ETPs (including ETFs and other exchange traded products such as ETVs/ETCs) to experience a similar growth rate and reach about $3.46 trillion in 2016 in our base case scenario, and pass $3.8 trillion in a bull market case.

ETF flows suggest that investors continue to prefer less risky assets

2015 was another strong year for global equity flows with over $250bn. Similarly, fixed income ETP flows also attracted healthy amounts of new cash reaching just above $100bn at the end of last year. However, other asset classes such as commodities with under $5bn of inflows didn’t enjoy the same degree of interest from investors.

Most of the major trends happened within equities. Among equity products, ETPs with exposure to developed markets excluding the US received the largest new allocations with inflows of $195bn last year. Meanwhile European-focused and Japan-focused equity products also received significant attention from investors with positive flows of $80bn and $50bn, respectively.

ETPs tracking US equities didn’t fall short either, and attracted $66bn in inflows during the same period. On the other hand, ETFs with focus on Chinese equities also received significant attention, but mostly due to the exodus of investors who pulled about $15bn away from these funds. Outside equities, the most remarkable trend was registered in fixed income where the investment grade space received over $70bn inflows during 2015.

Going into 2016, our house view continues to favor global equities (mainly DM), a strong USD as well as investment grade credit and short durations in Fixed Income (Europe is more preferable than the US). Therefore we expect equity products particularly in developed markets to continue attracting most of the flows. Certain type of Fixed Income products and currency hedge products should continue to remain relevant during 2016, although less than in 2015; while smart beta products should raise strong support as investors seek to control risk in a more specific way in the current year.

ETP trading activity up 16.8% in 2015 reaching $21.8 trillion and will continue to rise

Trading activity picked up in 2015 again with ETP turnover levels registering a rise of 16.8% over 2014. Overall turnover levels in 2015, 2014 and 2013 were $21.8 trillion, $18.7 trillion and $16.5 trillion, respectively. In 2015, Asian ETFs recorded the highest increase of over 100% in trading volumes ($1.9 trillion), significantly surpassing European on-exchange volumes ($903bn, up 22.9%). US ETFs continue to dominate the global ETP trading activity ($18.8 trillion, up 12.1%). We expect to see ETP trading activity to further increase in 2016 due to wider adoption of ETFs, elevated market volatility, and more product offerings.

ETF markets to continue forward on strong organic growth

In the US, the organic growth gap between ETFs and Mutual Funds, and Passive and Active Management continued to widen reaching levels of about $250bn and $500bn through the end of November 2015, respectively. In the meantime, we believe that there is still room for new entrants and new products despite the record activity registered during 2015; however we believe that smart beta ETFs and clear distribution access should be key to the success of new ETF ventures. Furthermore, we believe there is abundant room for organic growth in the range of $500bn to $1 trillion over the next 5 to 10 years just from migration away from less efficient vehicles and penetration to the retirement market.

In Europe, smart beta products expected to be in demand as market uncertainty remains and investment landscape evolves. Also, currency hedged ETFs to be utilized to invest with reduced currency risks. Despite poor start to equity markets, ETFs tracking European equities anticipated to have a reasonable year. In addition, absolute ETF trading volumes expected to increase despite concerns on overall equity volumes.

In Asia-Pac, Japan, China and South Korea were the key domestic markets which drove the industry in 2015. Most of the AUM growth and inflows of the region were contributed by Japan listed ETFs, while China listed equity ETFs saw heavy redemptions offset by money market ETFs receiving notable inflows. Trading activity also rose in the region in 2015, primarily in China, Hong Kong and Japan. South Korea saw most number of ETF launches along with many new development plans announced by its Financial Services Commission to boost ETF market in South Korea. We expect Japan (with increased equity allocation from GPIF and the ETF purchase from Bank of Japan), China (stronger asset growth as market stabilizes and increased product adoption) and South Korea (with new developments being implemented) to be major growth drivers in Asia-Pac region in 2016.

Health, Happiness, and Higher Rates

Health, Happiness, and Higher Rates. Now that the Fed has raised rates, there is more to celebrate than the holidays. Not only is the U.S. economy stronger, but 2016 may bring unique opportunities.

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Video Transcript

TOM BUTCHER: After much anticipation, the Federal Reserve (Fed) announced that it is raising short-term interest rates for the first time in nearly a decade. Jan, it looks as if we are wishing our clients health, happiness, and now higher rates this holiday season.

JAN VAN ECK: I think it is indeed a reason to celebrate because I think the Fed is saying that the U.S. economy is strong enough to withstand a normalization of monetary policy. It started a year ago with a roll-off of QE3, i.e., the third round of quantitative easing. Now it seems that the Fed is comfortable enough with U.S. labor statistics and the global economic situation, which had caused the Fed to delay this rate hike a couple of times in 2015. First, I think turbulence in Europe and the strengthening U.S. dollar against the euro concerned the Fed; then came [stock market] turbulence in China over the summer. Now there is reason to celebrate and things are relatively good.

The question is: What are the implications of the rate hike on our asset classes? I think there are few direct implications. With respect to commodities, there is still much consolidation that needs to wipe through the markets, and if a normal cycle is upon us, commodities should bottom in the first quarter of 2016 [see 11/25 post]. We think that this process will continue largely unaffected by the Fed’s rate hike.

Additionally, growth is slow in the developed markets and China is slowing; global growth has been weak for two years now. There are many headwinds, and we think these trends will persist as well.

What gets us excited for 2016 is what we call growth spots, meaning sectors in different countries that may grow 20% or more, regardless of whether global growth is only 2%. That’s how we are looking at 2016, and the Fed’s interest rate hike doesn’t really impact that outlook.

BUTCHER: Thank you very much.

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ETF Securities expands its short and leveraged offering on London Stock Exchange

• 2015 has seen increased investor demand for ETF Securities’ existing short and leveraged Exchange Traded Product (ETP) suite with global net inflows of approximately US$135 million

• 18 new 3x short and leveraged commodity ETPs and six new 5x short and leveraged currency ETPs listed on London Stock Exchange (the “LSE”)

ETF Securities Group, one of the world’s leading, independent providers of ETPs, has announced the listing of 18 new 3x short and leveraged commodity ETPs and six new 5x short and leveraged currency ETPs on the LSE today.

2015 has seen increased volatility across currencies and commodities and investors globally have demonstrated an increased interest in short and leveraged ETPs, with ETF Securities own platform experiencing US$135mn of inflows year to date.

ETF Securities was the first provider to list European currency ETPs in 2010 and is now the first provider to list 5x short and leveraged currency ETPs on the London Stock Exchange having already launched 3x short and leveraged commodity and 5x short and leveraged currency products in Italy and Germany earlier this year.

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Commenting on the launch, Townsend Lansing, Executive Director – Head of Short / Leveraged & FX Platforms, ETF Securities (UK) Limited, said:

“We are listing these new short and leveraged products on the London Stock Exchange in response to a strong demand from investors. We have seen tremendous growth in our short and leveraged platform across Europe over the last few years.

“The launch of our 3x short and leveraged commodity products and 5x short and leveraged currency products is a natural extension to our existing unleveraged range and offers a greater choice to investors.

“2015 has been a year of heightened currency volatility. We believe the additional leverage will first and foremost allow investors to use the currency products to hedge currency risk as well provide additional opportunities to trade on a short term basis with a competitive total cost of ownership.”

For more information on ETF Securities’ short and leveraged platform and educational material click here.

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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This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority.

This is a strictly privileged and confidential communication between ETFS UK and its selected client. This communication contains information addressed only to a specific individual and is not intended for distribution to, or use by, any person other than the named addressee. This communication (i) is provided for informational purposes only, (ii) should not be construed in any manner as any solicitation or offer to buy or sell any securities or any related financial instruments, and (iii) should not be construed in any manner as a public offer of any securities or any related financial instruments. If you are not the named addressee, you should not disseminate, distribute or copy this communication. Please notify the sender immediately if you have mistakenly received this communication. When being made within Italy, this communication is for the exclusive use of the ”qualified investors” and its circulation among the public is prohibited.

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This document 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 document may be based on back testing. Back tested performance is purely hypothetical and is provided in this document 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.

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The information contained in this communication 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.

ETFS UK is required by the United Kingdom Financial Conduct Authority (”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

Any products referenced in this document are generally 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 product issue. The price of any securities may go up or down and an investor may not get back the amount invested. Securities may valued in currencies other than those in which there are priced and will be affected by exchange rate movements. Investments in the securities 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 any securities referenced in this communication.

If you have any questions please contact ETFS UK at +44 20 7448 4330 or info@etfsecurities.com for more information.