TRADE OF THE MONTH

The eu­ro­zone, not China, to go long on, the US to go short

Financial Mail - Investors Monthly - - Contents - Robert Laing

The strong run of US stocks over the past five years makes them look ex­pen­sive now

R ecent elec­tions in France and Nether­lands, along with Italy’s ref­er­en­dum in De­cem­ber, have been more grip­ping than usual be­cause the op­pos­ing politi­cians rep­re­sented the great themes of our age: glob­al­i­sa­tion ver­sus na­tion­al­ism, open ver­sus closed.

Whereas the US and UK fell un­der the spell of dem­a­gogues whose xeno­pho­bic mes­sages fit­ted on base­ball caps and the sides of buses, cit­i­zens of the eu­ro­zone have so far over­whelm­ing shown their will­ing­ness to con­tinue the hard work of devel­op­ing a global, open econ­omy — which the US used to cham­pion be­fore it elected Don­ald Trump as pres­i­dent.

Some read­ers will no doubt ar­gue that peo­ple such as Trump and UK politi­cian Nigel Farage, who are pro­po­nents of laager­ing against oth­ers on our tiny, 40,000 km-cir­cum­fer­ence planet, are wise.

Thanks to the JSE’s grow­ing range of ge­o­graph­i­cally fo­cused ex­change traded prod­ucts — at the time of writ­ing there are seven ex­change traded funds and eight ex­change traded notes, track­ing var­i­ous global in­dices — it is easy to put your money where your mouth is.

A nice thing about these prod­ucts is you can buy a di­ver­si­fied port­fo­lio of for­eign stocks without hav­ing to go through the red tape of get­ting a for­eign ex­change al­lowance. The ex­change traded funds can be bought via tax-free sav­ings ac­counts of­fered by stock­bro­kers, and the wider se­lec­tion, in­clud­ing ex­change traded notes, can be bought via any re­tail stock­broking ac­count.

In­vestors want­ing to go long on the eu­ro­zone have a choice be­tween an ex­change traded fund that tracks the Euro Stoxx 50 in­dex which is cur­rently man­aged by Deutsche Bank — but in the process of be­ing handed over the Syg­nia — and an ex­change traded note of­fered on the JSE by France’s largest bank, BNP Paribas, which uses its pro­pri­etary Guru method­ol­ogy to se­lect its stock port­fo­lio.

Ac­cord­ing to re­turns cal­cu­lated by Absa Stock­bro­kers, Deutsche Bank’s Stoxx 50 track­ing ex­change traded fund has re­turned 15.11% over the past three months and av­er­aged an an­nual net gain of 6.25% over three years. The BNP Paribas’s eu­ro­zone ex­change traded note gained 10.43% over three months, but beat the Stoxx 50 with an an­nual av­er­age growth of 9.78% over three years. What com­pli­cates in­vest­ing in the for­eign in­dex track­ers is you are not only bet­ting on whether their con­stituent stocks will rise, but also how the rand will do against the cur­rency they are de­nom­i­nated in.

Since the bet is about open­ness, as in the trans­parency of­fered by a fund track­ing a port­fo­lio pub­licly avail­able at www.stoxx.com, against a se­cre­tive “black box” al­go­rithm of­fered by BNP Paribas’s ex­change traded note, I will place my long bet on the Stoxx 50 tracker.

On the third day of his pres­i­dency, Trump set the tone for it by scrap­ping the pro­posed 12-na­tion Trans-Pa­cific Part­ner­ship (TPP). The TPP would have joined mem­bers of the North Amer­i­can Free Trade Agree­ment — Mex­ico, Canada and the US — South Amer­i­can economies Chile and Peru and South East Asian economies Ja­pan, Viet­nam, Malaysia, Sin­ga­pore and Brunei with Aus­tralia and New Zealand. No­tably ab­sent from the list were China and South Korea.

By killing the TPP, Trump has opened the door for the com­pet­ing Re­gional Com­pre­hen­sive Eco­nomic Part­ner­ship (RCEP) which ex­cludes all coun­tries from the Amer­i­cas while in­clud­ing China and South Korea.

But why would some­one who be­lieves Trump has handed China eco­nomic hege­mony over an area ac­count­ing for more than a third of the world’s gross do­mes­tic prod­uct pick the eu­ro­zone rather than China to go long on?

Much as peo­ple may crit­i­cise France for its 35-hour work­ing week, it is a sure bet that a re­gion that en­cour­ages free think­ing and creativ­ity will beat an au­thor­i­tar­ian regime.

JSE in­vestors can in­vest in China via Deutsche Bank’s MSCI China in­dex track­ing ex­change traded note, which has av­er­aged an 18% an­nual re­turn over the past five years and gained 8% over the last three months. Stocks in the broader re­gion are avail­able via BNP Paribas’s Guru Asia ex­change traded note, which has av­er­aged 9% growth over three years. There is also Deutsche Bank’s MSCI Ja­pan in­dex track­ing ex­change traded note, which has av­er­aged an im­pres­sive 20.29% re­turn over five years — beat­ing China, but lag­ging Deutsche Bank’s MSCI USA in­dex tracker’s 25.26% av­er­age an­nual re­turn over the past five years.

Be­sides Trump’s ru­inous poli­cies, the strong run of US stocks over the past five years makes them look pre­car­i­ously ex­pen­sive now, per­suad­ing me to rather go short than long on them. One al­ter­na­tive to Deutsche Bank’s MSCI USA prod­uct is Core­shares’s re­cently launched S&P 500 in­dex track­ing ex­change traded fund.

For any­one want­ing to in­vest in the US, I rec­om­mend the Core­shares prod­uct since its an­nual man­age­ment fee is 0.45%, nearly half the 0.855% Deutsche Bank charges. An­other al­ter­na­tive is BNP Paribas’s Guru US ex­change traded note, which as the ad­van­tage of zero man­age­ment fees but with an av­er­age 17.79% an­nual re­turn over three years has been out­paced by Deutsche Bank’s MSCI USA track­ers’s 19.13% av­er­age over the same pe­riod.

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