Etikett: Germany

Rates going up…maybe not so fast

Rates going up…maybe not so fast

When examining the fixed income market outlook within the Euro zone, inevitably the discussion turns to Italy, and what the potential ramifications of this ongoing budget saga will be. Of course, the direction of European Central Bank policy (ECB) is closely linked here, but if we were to turn our attention to the broader economic outlook, how would that discussion pivot? Based upon recent data, it appears as if the widely held view that interest rates are poised to move higher may have to be revisited.

That being said, it is not as if we don’t think that Euro zone rates will, at some point, move higher, but the timing and magnitude of any potential increase could ultimately impact investment decisions. As we saw in the US, the ‘runway’ for an elevated rate setting can be much longer than expected, and traditional factors such as growth, inflation and central bank policy, do not always move in tandem.

Figure 1: Euro zone Purchasing Managers Indices (PMI)

Source: Bloomberg, as of 23 November 2018. Data for Italy and Spain only goes up to 31 October 2018. Historical performance is not an indication of future performance and any investments may go down in value.

With respect to Euro zone economic numbers, one could be easily forgiven for concluding that, perhaps, the peak in activity occurred last year. It’s not as if we are expecting a recession, but based upon recent data, a steady slowing in growth appears to be a potentially likely scenario. To provide some perspective, Euro zone real GDP rose up to +2.4% in 2017, but current consensus forecasts are looking for a reduced pace of +2.0% for this year and +1.7% for 2019.

The latest growth readings within the Euro zone certainly stood out, and not necessarily for positive reasons. German GDP came in at -0.2% in Q3 2018. This was weaker than expected and followed on the heels of a +0.5% gain in Q2 2018. In addition, it represented the first decline since 2015, and while it did reflect some temporary factors such as reduced auto production due to emissions testing, according to the statistics office, it was also the result of a drop in both exports and consumption. While the car production aspect could be reversed in upcoming data, the trade and consumption components certainly bear watching. For the Euro zone as a whole, growth also slowed to +0.2%, or half the pace of the prior period, and the lowest reading in four years.

Another important economic indicator to keep your eye on are the PMI reports. For the Euro zone and countries such as Germany, France, Italy and Spain individually, the readings seemed to have hit their peaks in late 2018/early 2018 and have been on a steady descent ever since (see figure 1). For the entire Euro zone, the latest figure fell to its lowest level in almost four years, highlighting the potential for further economic slowing.

Conclusion

Needless to say, this scenario has raised the debate regarding potential ECB action. While these numbers will more than likely not prevent the beginning of balance sheet normalization (expected to be announced at the 13 December 2018 policy meeting), it could push the ECB into a ‘later rather than sooner’ timetable for the first rate hike. For the record, the implied probability for this first rate hike has now been pushed out past October 2019, as of this writing.

Source of data unless stated otherwise: Bloomberg, 14 November 2018.

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The content on this document is issued by WisdomTree UK Ltd (“WTUK”), which is authorised and regulated by the Financial Conduct Authority (“FCA”). Our Conflicts of Interest Policy and Inventory are available on request.

For professional clients only. Past performance is not a reliable indicator of future performance. Any historical performance included on this document may be based on back testing. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested performance is purely hypothetical and is provided on 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. The value of any investment may be affected by exchange rate movements. Any decision to invest should be based on the information contained in the appropriate prospectus and after seeking independent investment, tax and legal advice. These products may not be available in your market or suitable for you. The content of this document does not constitute investment advice nor an offer for sale nor a solicitation of an offer to buy any product or make any investment.

Dividends as alternative sources of income

Today, there are more investment choices than ever before. Yet, when looking for income, a lot of investors tend face two options:

• Take More Risk: Usually, this ends up being “credit” risk, which deals with the chance of an entity being able to meet specific obligations. Common strategies may focus on “High Yield” or “Floating Rate” debt, or dealing with European Banks, AT1 Coco Bonds. Why is there more income? To compensate investors for taking greater risk that payments won’t be made.
• Accept Lower Income: People are aging, so “lower income” may not necessarily be an option for everyone. If safety of principal is the primary objective, then there is little safer than government debt of some of the world’s most creditworthy countries, such as the United States, Germany or Japan. We cite these three countries because they also have exhibited “safe haven” characteristics, meaning that when investors are nervous, the value of these assets has historically tended to rise.

The ugly nature of inflation

Inflation is important to consider because it may be one of the most significant challenges facing investors in the future. Central Banks printed an awful lot of money in response to the Global Financial Crisis of 2008-2009. History has indicated that typically the consequence of this response is higher inflation. Consider that, at 3% inflation, prices double every 24 years and at 5%, they double every 15 years. Inflation truly erodes real returns, as the purchasing power of future units of currency—be it British pounds, US Dollars or Euros—can buy less and less and less over time.

To give investors a sense of the current environment :

• The US 10-Year Treasury is yielding slightly more than 3.20%.
• The United Kingdom 10-Year Gilt is yielding almost 1.60%.
• The German 10-Year Bund is yielding less than 0.50%.
• The Italian 10-Year BTP (not currently in the headlines for its lack of risk—quite the opposite) is yielding nearly 3.40%.

An alternative may be dividend-paying stocks, as these are one investment option that could not only potentially provide income, but also have a higher potential for price appreciation—providing the opportunity to keep up with inflation. Consider that dividend equities:

• Offer the potential to grow your income stream through dividend growth, in fact, outpacing the rate of inflation over the entire history of the S&P 500 from 1957 to today .
• Provide potential growth of principal through price appreciation
• May offer more downside protection than their non-dividend paying counterparts

Dividends are everywhere

First, it is worth noting that dividends are quite prolific. Small, medium and large companies all over the world offer dividends, with nearly 35% from the United States, more than 18% from emerging markets and almost half coming from Europe and other developed international countries.

Figure 1: The world broken down by dividend stream weighted exposure

Sources: WisdomTree, Factset, Standard & Poor’s, with data measured as of the 30 September 2018 WisdomTree Global Dividend Index Screening. Historical performance is not an indication of future performance and any investments may go down in value. You cannot invest directly within an Index.

New paradigm for asset allocation?

While it is always difficult to make such a bold statement, we think that it is always important and valuable to look across different, logical alternatives. For decades, people have looked at equity markets and thought in terms of weighting stocks by their market capitalization (share price x number of shares outstanding). Doing this, roughly speaking, leads to approximately 50% weight to the US, 40% weight to the developed world ex-US, and 10% weight to emerging markets . Figure 1 substitutes “dividend per share” for “share price” in the aforementioned equation, and we saw the results in the regional allocations. Now might be an interesting time to be thinking in these ways, as the US equity market has tended toward strong outperformance for the better part of the past 10 years.

By Christopher Gannatti

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

President Elect Trump– Geopolitical & Market Implications

President Elect Trump– Geopolitical & Market Implications

President Elect Donald Trump’s ability to resonate with the populist mood has proven successful – populism in the developed world is on a worrying rise. We have collated what we believe are the most important investment implications of Donald Trump winning the US election.

Politics

  • The uncertainty around Trump’s political agenda and the possible increase in protectionist measures could weigh on global trade and ultimately dampen the global economic outlook, favouring bonds over equities
  • It is likely there will be panic amongst Nato allies in the Baltic states as Putin may decide to use Donald Trump’s friendly relationship to position troops in the region
  • In Europe in 2017 there are elections in France, the Netherlands, Germany, Austria and potential for an election in Italy. In these regions many populist parties are either leading or rising rapidly at present leading to further market volatility in 2017

Currencies

  • Currency vigilantes are likely to act. A sharp fall in the USD will result as uncertainty over trade and foreign policy jumps
  • Rising FX volatility is another negative for the GBP. GBP moves inversely to volatility and will likely sell-off against major currencies. JPY and CHF will be the big gainers under a Trump Presidency
  • MXN will experience a sharp fall as anti-Mexican sentiment from Trump is likely to depress investor optimism about the future of NAFTA and the benefits that accrue to Mexico from free trade

Equities & Gold

  • Donald Trump has been critical of loose monetary policy and is likely to seek a new governor with a more hawkish outlook when Yellen’s tenure is complete. Investors are likely react negatively to this monetary policy uncertainty
  • Furthermore, US equities are trading at a 50% premium to their long-term cyclically adjusted valuations, making them more vulnerable to a sell-off. Consequently, some equities are likely to hit their limit down (5% fall) and therefore have trading suspended
  • A weak USD is likely to benefit the S&P100 as 50% of revenues are derived from abroad, although, in the shorter-term they are likely to decline too.
  • A Trump win is likely to drive gold prices higher as investors seek a haven asset in a similar manner to what we saw during Brexit. Gold miners will likely benefit as they have a 2.4x beta to the gold price
  • Donald Trump has pledged $550bn of infrastructure spend, having control of both the House and the Senate means he has a higher chance of getting these proposals approved. Industrial stocks that maintain civil infrastructure are likely to benefit from higher opportunities for government projects under Trump

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.

Market overreacts to Iran sanction lift

Market overreacts to Iran sanction lift

ETF Securities Commodity Research – Market overreacts to Iran sanction lift

Sanctions placed on Iranian oil exports by the US and five other countries were lifted after the International Atomic Energy Agency found the country to be compliant with its nuclear agreement with the P5+1 (the permanent members of the United Nations Security Council–the United States, the United Kingdom, Russia, France, and China plus Germany), plus the European Union.

Iran expects to lift exports by 500,000 barrels immediately and plans to increase shipments by a further 500,000 barrels within months.

Despite Iran’s ambitions (which we admit could lead the country to ignore oil economics in pursuit of winning market share), the country’s dilapidated infrastructure is unlikely to support the export of more than 300,000 extra barrels of oil.

Iran does not have enough fields in operation. Bringing online fields that have been delayed since 2014 would at most allow for 400,000 additional barrels. Immediately injecting cash investments cannot bring that figure up without a very long delay (18 months at minimum and more likely 2-3 years to build new operational infrastructure)

Expanding Iranian production significantly will require the build-out of more infrastructure, which would require the assistance of international oil companies. In an era of low oil prices and global oil capex cuts, the appetite to get involved is likely to fall short of expectations.

Iran will encounter difficulty in marketing its oil. The sanction lift is limited, especially with regard to US corporate involvement. US companies, including banks, insurers, oil companies or any US national cannot be involved in the selling of Iranian oil or the procurement of infrastructure. Sales of Iranian oil cannot take place using

US dollars. While European companies have more flexibility, their close ties with the US pose challenges. Had oil prices been higher, Iran’s strategy would have been to offer deep discounts on price to sell to countries like India to compensate for the increased complexity of dealing with its oil. But with oil prices so low, there is little potential for discounting.

Any expansion on Iranian oil production as a result of the sanction lift will not be picked up in today’s OPEC Monthly Oil Market Report and the earliest point in which we will have any concrete data on production and export increases will be on the 10 February report. We believe that the market will be disappointed with the outcome.

Saudi Arabia’s strategy to increase market share by depressing oil prices is working, judging by the size of the announced energy capex cuts in high-cost producing countries. We believe that by OPEC’s 2nd June 2016 meeting, Saudi Arabia will soften its tone and prepare the market for lower production (although little agreement to cut OPEC production will take place at that meeting).

Demand has meanwhile been recovering strongly in an era of low prices. IEA expects oil demand to rise to 96.71 mb/d by Q4 2016 from 95.28mb/d in Q4 2015. As global capex cuts start to bite, non-OPEC oil production is likely to fall. Factoring in a generous 1mn barrel increase in Iranian exports, would still mean that the market is likely to be in a small deficit by the end of the year.

As the oil market moves back toward balance, prices will likely recover. But we believe that the disappointment around Iran’s ability to ramp up exports will hit the market earlier and reverse the sharp decline we have seen in recent days.

Download the complete report (.pdf)

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 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.

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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.

 

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

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

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 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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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.

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