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Tactical Asset Allocation Relative Strength Signal (TAARSS) Monthly Update
Top recommendations for March: Gold, US Treasuries, High Grade Credit, US Utilities, and Indonesia.
Recent market relief rally is not consistent with ETF flow trends
Since Feb 11, global equity markets experienced a relief rally of over 5% through the end of February. However the stock market hype was not enough to change investors’ sentiment as reflected in flow trends. Actually, although inflows into safe haven assets such as Gold, US Treasury, and IG Credit, and outflows from Equity both slowed down; the underlying trend of preference for defensive assets over riskier ones remained intact (Figure 1). Therefore we remain skeptic regarding the sustainability of the recent rally, and would rather wait for a clearer signal before calling for a switch back to risk-on mode.
Tactical positioning for March based on TAARSS
Overall we continue to see stronger support into defensive assets over risky assets.
For Global Equities we recommend to remain on the sidelines, or look for specific themes with attractive support such as Global Natural Resources.
For US equity prefer a sector approach. We again favor Utilities and Telecom for March. While for Intl DM equities we prefer Canada.
And for EM equities we prefer Indonesia and Latin America on recent support build-up.
In Fixed Income, prefer US Treasuries and IG credit over HY credit. In Commodities, prefer Gold on very strong support.
The Synthetic Equity & Index Strategy Team
Deutsche Bank – Equity Research
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.
Tactical Asset Allocation Relative Strength Signal (TAARSS) Monthly Update
Top recommendations for November: Corporate HY, and US, European, Indian, and Chinese equities.
US Large Cap-Small Cap positive spread supported by ETF flows
In October the Large Caps (SPY) outperformance over Small Caps (IWM) reached levels above 3% towards the month’s end. Interestingly, we saw a clear flow divergence between these two segments during the first half of the month with Large Caps receiving inflows and Small Caps recording outflows, before both segments began to receive inflows consistently (Figure 1).
Corporate credit ETFs received largest monthly allocations ever on risk comeback during October
US Treasury ETF flows opened with a strong momentum following the recent safe-haven trends; however the trend began to revert just before the mid-month mark. In the meantime, Corporate credit ETFs went on to register one of their strongest flow trends on record, fueled by the largest-ever dollar monthly flow allocations received by HY (+$5.5bn) and IG (+$3.3bn) as investors orchestrated a comeback to risk assets (Figure 2).
Tactical positioning for November 2015 based on TAARSS
Prefer global equities and high-beta-to-equity fixed income segments such as HY corporate credit. Continue to avoid commodities.
Prefer a balanced global equity approach including US, Intl DM and EM.
For US equity exposure prefer large caps, with support favoring particularly Consumer Staples and Tech.
For Intl DM equities prefer Europe over Asia Pacific, stay neutral to Japan. Implement Europe via regional exposures rather than country allocations.
For EM equities, continue to prefer Asia over Latin America and Eastern Europe. Within Asia we prefer India and China.
In Fixed Income, prefer credit over rates. Implement this via corporate IG or HY credit; while avoiding US Treasuries.
As of the end of May 2015, global ETP assets stood at $2.87 trillion with European ETP assets amounting to $507bn (€463bn). During the month of May, Equity ETFs registered inflows of +€0.9bn which were offset by outflows from Fixed Income ETFs (-€0.9bn). Commodity ETPs listed in Europe saw inflows of +€0.2bn over the last month.
European equities continue to attract new money
Since the start of 2015, ETFs with European equity exposure gained significant interest, both among European and US investors. In May, we observed inflows again into European equities for listings in both US and Europe, although in a smaller magnitude compared to the months in Q1 2015. Where European listings were concerned, our analysis shows a net inflow of +$846mn (+€762mn) and for US listed ETFs we saw +$2.1bn inflows in May.
Fixed income ETFs experience outflows for the first time in 2 years
Towards the end of April, bond markets started to sell-off pushing yields back up from their all time lows amid signs of economic recovery and increasing bond supply. This was reflected in the ETP market where we saw net redemptions within the asset class for the first time in 2 years, on a monthly basis. Over the month of May, fixed income ETFs saw outflows of -€865mn. This was driven mainly by sovereign bonds based ETFs from which investors’ pulled out over -€1bn.
Dividend theme lost momentum in May
In May, Dividend ETFs saw negative flows of over -€500mn. Many of the ETFs in this category saw outflows but it was skewed by a single heavy redemption in a US dividend ETF tracking the S&P High Yield Dividend Aristocrats index, totaling c.-€350mn.
German and Japanese equities preferred over UK and US equities
Among ETFs providing single country exposure, Germany, Japan, South Korea and France saw significant activity receiving inflows of +€1bn, +€355mn, +€278mn and +€203mn respectively. On the losing side, ETFs benchmarked to UK, US, Switzerland and China equities saw outflows of -€597mn, -€530mn,-€192mn and -€116mn respectively.
Tactical Asset Allocation Relative Strength Signal (TAARSS) Monthly Update
We highlight: HK, China, US Treasury, Energy Cmdty, EM on the strong side; and Agribusiness, France, Italy, Utilities, and Europe on the weak side.
Market review
Global equities (ACWI) and US bonds (AGG) recorded gains of 2.58% and 1.15% during August, respectively. In the meantime, Commodities (DBC) experienced another month of weakness posting a loss of 1.15% last month.
TAARSS rotation strategies were mostly positive for the previous month; with most strategies outperforming their benchmarks. Within equities, the US (3.95%), US Mid Caps (5.06%), Latin America (8.59%), and Switzerland (2.53%) were the strongest performers per strategy; while Gold (0.38%) and Convertibles (3.24%) were the top categories within commodities and fixed income, respectively during the month of August.
Tactical positioning for September 2014
For the month of September, TAARSS equity positioning indicates a preference for Large Caps within the US and away from mid & small caps, Asia Pacific and Latin America among regions away from Europe, EM for market allocations, and Hong Kong for DM countries and away from France and Italy. In terms of fixed income sectors, TAARSS favors US Treasuries while steering away from EM Debt and Senior Loans; moreover Energy saw a very strong signal within the commodity rotation. Within non-rotation equity signals (US sectors and industries, EM countries, and equity themes), we highlight strong trends in International Real Estate, EM Asia (China, South Korea, and India), Latam (Brazil and Mexico), Russia, and domestic cyclicals (e.g. Cons. Discretionary and Transportation); while Utilities and Agribusiness are among the weakest ones.
