Precious metal adjustments

The trends of the past month say a lot about how investors are seeing the market

s a financial journalist, I always keep half an eye on Sens, the JSE’s news service, for company announcements, results and the like.

In between the flurry of notices posted by Curro and AdvTech last month, as the fiasco between the two private schools groups played out, I noticed that a trend emerging in the ETF space. Redemptions of gold debentures and additional listings of platinum, preference share and property ETFs.

Because issuers of ETFs have to hold the underlying asset (whether that’s equity in a company or physical metal in the case of gold and platinum) and because the market maker has to carry inventory on its books so that it can make prices to the market, any swings in investor demand will affect issuance.

The trends of the past month reveal a lot about how investors are seeing the market at the moment in terms of both opportunities and risk.

Wayne Dennehy, who heads ETFs and passive investments at Absa, says there has been a lot of rotation between the NewGold and NewPlat ETFs from investors, who may be seeing more value in platinum than in gold for the future.

While the dollar prices of both metals have come off sharply this year, platinum broke back below gold again in January and has widened its discount.

Though the market maker — Absa in this case — is not the only market maker, as anyone can post prices, globally gold ETF redemptions have increased. Consultancy GFMS’s second-quarter statistics for the gold sector show that after a 37 t rise in ETF gold holdings in the first three months of the year, there was a 1 t decline in the second quarter, with further drawdowns reported last month.

It’s quite a supercycle of fortunes between the two precious metals, Dennehy says.

Demand for the platinum fund aside, Dennehy says Absa’s fastest growing ETF remains the Govi, which has tripled in size over the past year. This ETF covers South African government fixed-income bonds. In an environment where inflation and interest rates are on the rise, you might have thought that investors would be more inclined to buy inflation-linked bond ETFs, such as Absa’s Ilbi (inflation-linked bond index) or RMB’s Inflation-X, but the rising interest rate cycle will only hurt fixed income assets and the Govi to the extent that the rate hiking cycle exceeds what the market is already pricing in.

The market and the bond curve are expecting further rate hikes, which are already in the bond prices — that is, at least 1%-1,5% in the next two years.

If there’s a shock and rates go up by more than is already priced in, yields will rise sharply and the Govi will underperform cash.

Absa’s is also the only Govi ETF in the market, and as fund of funds and platforms put together diversified portfolios for their clients, they need fixed income assets to set up a well diversified portfolio and there is not much choice in the ETF landscape. This asset class has held up well, with a one-year return of about 7,2% by late July against equities (Swix) at a total return of 3%.

Staying with the interest rate theme, after a poor couple of years the preference share market has also seen some interest, and CoreShares’ PrefTrax has grown nicely with that (despite it being a rather niche asset class).

CoreShares head Gareth Stobie says this can definitely be attributed to a defensive hedge against volatile markets as well as rising interest rates. The yield is linked to prime, which means that if interest rates shift up, your coupon and yield improve. So while investors tend to focus on price, a yield of over 8% on PrefTrax gives a nice underpin.

Clearly, though, the star performers have been some of the smart beta strategies and the property ETFs.

CoreShares’ Dividend Aristocrats ETF has also been doing well, albeit off a low base as it is still a relatively new product. Stobie attributes this to a few things: excellent one-year performance, “quality” filtered stocks and overall better education around dividend-yielding strategies and CoreShares’ ETF offering.

However, if it’s volatile markets you’re worried about, in terms of tactical allocations he positions the LowVoltrax ETF as a good hedge.