The weakness of the Japanese Yen in recent weeks following the Trump-led strength in the US dollar has once again thrown the spotlight on the performance potential of Japanese equities. Indeed, it may come as a surprise to some investors that, despite the relative weakness of the Japanese economy in the past decade or so, equity returns have held up reasonably well. What’s more, history shows that in those periods when Japanese equities tend to outperform it is usually when the Yen is weak. Should the Yen continue to weaken in 2017, therefore, it suggests Japanese equities may do relatively well – particularly on a currency-hedged basis.
With the silly season upon us, I feel it’s the perfect time to reflect on 2016. It has been a big year for ETPs in Australia and around the world! I’ll also try to make some predictions on where I think the future developments may lie for the Australian exchange traded products industry, as we move towards 2017 and beyond.
No sooner have global markets digested the Brexit decision and the election of Donald Trump as US President (arguably “Brexit Mark 2”), another risk event now looms on the horizon: Italy’s constitutional referendum on December 4. As this note explores, should voters reject the referendum (as polls indicate they might), it could lead to further weakness in the Euro and an extension of accommodative central bank policy – both of which could, perhaps perversely, aid European equities, at least on a currency-hedged basis. European concerns could also add to the Trump-related upward pressure on the US dollar.
In this guest contribution, Wade Matterson, Principal at Milliman Australian Financial Risk Management, discusses why the retirement industry is obsessed with the dangers of short-term thinking.
Investors are encouraged to ‘stay the course’ during periods of poor investment returns or high market volatility, and to remain focused on their long-term goals – and it is good advice. But it is also advice which can appear self-interested and, worse yet, has limited impact because people are naturally hard-wired to act in their short-term interests.
A Presidential Election Cycle?
With the US Presidential election over, the focus of investors naturally turns toward the outlook for stocks.
In the US, debate about a so-called “Presidential election cycle” has raged for years. The theory posits that Wall Street tends to do better in Presidential pre-election and election years, and worst in the first post-election year. This is based on the view that Presidents tend to pump up the economy to ensure their re-election (or that of their party’s new candidate) and then re-apply the brakes in the year after winning office.
The rise and rise in the price of Australia’s major commodity exports – coal and iron ore – has been one of the astounding features of this year. This note explores to extent to which this gain in prices was fundamentally justified, and whether these solid price gains can continue. It also re-explores valuations in the Australian resources sector.
As has been evident at investor briefings in recent days, Australian banks appear to be conceding that their past relatively high (by global standards) returns on equity can’t be sustained, due to pressure on net-interest margins and increased capital requirements. That said, given the underperformance of banks over the past year or so – especially compared to other high yield sectors like listed property – this downward adjustment in profitability has arguably already been priced into valuations. At least on a relative basis, the Australian financials sector now appears good value, especially if long-term bond yields rise further. What’s more, concerns that new capital requirements could crimp bank dividend yields may be misplaced.
The Australian exchange traded fund industry bucked the trend of broader market declines during October and finished the month valued at a stable $24.1B, which was approximately the same value as September. The industry stood its ground amongst local and international sharemarket declines to record higher levels of inflows compared to September, with +$629m of new money received.
The market conditions suited short funds with the two BetaShares Strong Bear Hedge Funds (ASX: BBOZ/ BBUS) amongst the best performing exposures for the month, indicating how product innovation in exchange traded products has allowed investors to take a view on the market and profit from, or protect against, falling sharemarkets.
With the rotation out of high priced defensive income stocks in the Australian equity market in recent months – and toward sectors offering relatively better value, such as resources – fundamentally weighted indexing methodologies have again demonstrated their ability to outperform traditional market-cap weighted indices over time.