ETFs recover as confidence grows
Australia’s exchange traded funds (ETF) industry has staged a V-shaped recovery from the Covid-19 pandemic, with funds under management increasing 4% to $64 billion in May, just 3% below its all-time high of $66 billion.
Sixty per cent of the increase came from net inflows with the rest made up by appreciating asset values.
Through May, more than $1 billion flowed into equities. Australian equities accounted for most of this at $666 million, while international equities saw inflows of $493 million.
Fixed income also enjoyed a reversal in fortune, with $166 million in new money due mostly to rising Australian bond prices, following two months of Australian bond outflows.
“We are seeing a rise in investor confidence as markets continue to recover from the lows hit in mid-March,” says BetaShares chief executive Alex Vynokur.
“The continued strength in trading volumes is also a big positive for the industry – the last four months have been the four highest trading months on record, indicating that in turbulent times Australian investors are finding the liquidity of ETFs attractive, regardless of whether markets are rising or falling.”
The already struggling Aussie banking sector copped the full brunt of the coronavirus pandemic, and it’s showing in its market performance.
“In the last five years the pain associated with owning Australian banking shares has been pronounced, with the sector underperforming the broader market by 45%,” says Bruce Apted, from State Street Global Advisors (SSGA).
“A combination of greater regulation and higher capital requirements, lower loan growth, declining interest rates and increased competition has contributed to lower operating returns for Australian banks.”
Will those trends reverse in the current environment?
Not very likely, says Apted. It’s a difficult for the banks globally, and Australian banks are no exception, though prices briefly rallied in early June.
“Interestingly, loan growth did pick up temporarily in March due to many businesses drawing down on credit facilities to shore up their liquidity positions. Not the reason you want loan growth to increase!” he says.
The underperformance of the banks has opened up some medium-term valuation return potential, but SSGA says it’s still early days.
“Until sentiment stops deteriorating, it will be difficult to see a sustained rerating for Australian banking stocks.”