Post-election market highlights:
- Cyclical stocks rally on spending fuelled growth expectations
- US dollar rises to 13 year highs
- Bonds sell off and US rate hike expectations firm
- Precious metals decline, while industrials rise
Opportunities:
Two weeks on from the US election, following some initial volatility, the reaction of global markets to the Trump presidency has been positive as themes of fiscal stimulus, growth and inflation have come to the fore. Whether you believe that Trump’s policies will meet the market’s positive expectations, or if you think further volatility lies ahead, ANZ ETFS’ product range could be a useful addition to your portfolio.
ZYUS – invest in US stocks with a low volatility/defensive bias to participate in equity market upside, while helping to withstand volatility and a decline in growth expectations.
ZUSD – invest in physical US dollars to take advantage of any further strengthening against the Aussie.
ZGOL – invest in gold to diversify your portfolio and help protect against a volatile equity market or high inflation.
Market Commentary:
Equities:
The S&P 500 has now risen by 3% since 8th November and all four major US benchmark indices have reached new all-time highs this week.
Sector-wise, traditional cyclical and growth sectors have seen the highest total return since 8 November, with Financials, Industrials and Consumer Discretionary stocks faring the best to date. Defensive sectors including Utilities, Consumer Staples and Real Estate have underperformed.
The VIX index of market volatility reverted immediately to its October levels indicating the emergence of a risk-on environment. Small cap stocks have also outperformed large cap multi-nationals, whose gains have been tempered by a strengthening US dollar.
Chart 1: Sector performance of US equities since close of business on 8th November, 2016 (USD total return)
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Source: Bloomberg data as at 21 November 2016
Product spotlight: ANZ ETFS S&P 500 High Yield Low Volatility ETF (ZYUS)
Investors who are looking to enter the US equity markets may consider a position in ZYUS. ZYUS holds a portfolio of 50 US stocks that are selected based on having both a high yield and a low level of volatility and therefore tends to be biased towards defensive stocks and sectors.
ZYUS may be suitable for investors who are looking to take a more conservative position on further US growth prospects or those that believe the market may have over-reacted since the election, leaving defensive stocks undervalued. With details of Trump administration policies yet to emerge, is it quite feasible that shocks to the market and further volatility will persist, which may see a return to favour of defensives. Furthermore ZYUS is not currency hedged, meaning that a holding in the fund would benefit from further strengthening of the US dollar.
Rates and FX
The US dollar has been the big winner in currency markets so far, with the DXY dollar index rising to 13 year highs. The Australian dollar has continued a gradual decline, dropping 6% from its pre-election high of US 77.7c to be trading below US 73.3c. Most emerging market currencies have also declined, with the Mexican peso being hit the hardest.
Chart 2: US dollar index (DXY) long term price history
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Source: Bloomberg data as at 21 November 2016
US 10 year Treasury yields jumped to above 2% for the first time since January on speculation of higher rates, higher inflation and higher government debt levels. The spread between US and Australian government bond yields is now at its narrowest since 2001. Corporate bonds also took a hit, with the Bloomberg Global Investment Grade Corporate Bond Index down 3.4% since 8th November.
Chart 3: US and Australian 10 year government bond yields and the yield spread:
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Source: Bloomberg data as at 21 November 2016 (white line is the US 10 year Treasury yield, Purple line is the Australian 10 year Government Bond yield, red line is the yield spread)
At the short end of the curve, the futures-implied probability of a 25 basis point rise at the Fed’s December meeting has increased from 60% in early November to 10% as at 22nd November. RBA rates look to be on hold but with an easing bias for the medium term based on market implied probabilities. The likelihood of a rate cut exceeds the likelihood of a rise out until November 2017.
Product spotlight: ANZ ETFS Physical US Dollar ETF (ZUSD)
Investors of the view that the US dollar will continue to strengthen against the Australian dollar will directly benefit from a holding in ZUSD if that proves to be the case. ZUSD is 100% physically backed by US dollars and is the lowest cost way of gaining US dollar exposure within the Australian ETF market.
Commodities
In commodity markets, precious metals have declined with the rise in treasuries and shift into growth assets, though heightened inflation expectations could provide some support. Industrial metals have rallied strongly on expectations of US demand from Trump’s promised infrastructure spending.
Chart 4: Year-to-date price performance of Gold and Bloomberg Industrial Metals Subindex
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Source: Bloomberg data as at 21 November 2016
Product spotlight: ANZ ETFS Physical Gold ETF (ZGOL)
Investors of the view that the market reaction has been overly optimistic and that there may be shocks ahead may be interested in allocating some of their portfolio to ZGOL. Gold, which has a low to negative correlation with equity markets, is traditionally used as a portfolio hedge against negative equity performance or volatility. Gold is also commonly used as a hedge against inflation, so those concerned that Trump’s policies could see higher than anticipated inflation should also consider ZGOL.
