TRADE OF THE MONTH
The eurozone, not China, to go long on, the US to go short
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.