Financial Mail - Investors Monthly
TRADE OF THE MONTH
Investors who want to go offshore have a difficult choice between regions
Atough call awaits investors who believe it is not too late to put money into offshore equity. A crucial part of their call will be to choose between the US, European and UK markets.
It is a call even the investment professionals are not entirely certain about making. “There is no easy answer,” says Douw Steenkamp, global portfolio manager at Denker Capital, a Sanlam affiliate.
With the benefit of hindsight there is no doubt about which market has been the best call so far.
Deutsche Bank’s DBX Tracker MSCI USA exchange traded fund (ETF), which tracks the MSCI US big-cap share index, trounced the developed market opposition over every period from one to seven years. Over five years to the end of April, assisted by a strengthening US dollar and sliding rand, the fund achieved a blistering average annual return of 27.72%. So R1,000 invested at the start of the period was worth R2,400 at the end.
The US tracker fund’s nearest rival in the Deutsche Bank ETF fold, the DBX Tracker MSCI UK FTSE 100 index fund, was far behind with an average annual return of 16.74%.
Trailing the pack, the DBX Tracker MSCI Eurostoxx 50 delivered an average annual return of 12.5%. The Eurostoxx 50 index is composed of the 50 biggest listed companies in 12 eurozone countries.
Among developed equity markets, the US remains the firm favourite among ETF investors, according to data for April from BlackRock.
Spurred on by unexpectedly dovish statements on US interest rate policy by Federal Reserve governor Janet Yellen, $11.55bn poured into US ETFs.
By contrast, ETF investors redeemed a record $6.3bn out of European equity ETFs.
“European equity outflows were driven by domestic and foreign investors, with volatility in the euro and tightening financial conditions weighing on sentiment,” noted Ursula Marchioni, chief strategist, iShares EMEA at BlackRock, in a statement.
She said that while European stocks look attractive because of economic policies focused on stimulating private consumption, there are geopolitical risks.
Most prominent among these risks is Brexit, an abbreviation of the UK’s potential exit from the European Union (EU). The world will know after UK voters take part in a referendum to be held on June 23 this year.
Steenkamp believes the chances of the referendum going the way of those calling for an exit are relatively low. But if it did go that way, there would be “turmoil” in markets, he says.
The gravity of the situation was spelt out by British prime minister David Cameron, who has warned that if the UK were to vote to leave the EU it would put peace in Europe at risk.
In mid-May, 58.6% of punters placing bets with UK bookmakers were wagering that the UK would stay in the EU and 41.4% were betting it would leave.
Political uncertainty also reigns in the EU’s third-largest economy, Spain, where a general election in December last year failed to produce a government. Spanish voters go back to the polls on June 26. UK newspaper The Guardian comments: “If the polls are to be believed, the June election will deliver a similar result to December’s.”
And while Marchioni’s view is that European equity looks attractive, there are different opinions. According to Swiss bank UBS, the consensus 2016 earnings growth forecast for EU companies stood at 0.5% at the end of March, the lowest level since the first quarter of 2009.
“Investors got overenthusiastic about EU equity,” says Philip Saunders, co-head of Investec Asset Management’s multi-asset team in London. “The US has better earnings growth dynamics. We are overweight US stocks.”
Steenkamp agrees. “There are some very good companies in Europe but US companies tend to be more proactive and react faster to change,” he says.
“In the long term, US companies tend to outperform their foreign peers.”
But US companies are hardly producing impressive results right now. According to US research firm FactSet, overall year-on-year earnings in the first quarter of 2016 were down 7.1%.
It was the largest decline since the third quarter of 2009, when earnings fell 15.7%. Also of concern, the earnings decline in the first quarter of 2016 marked the first four consecutive quarters of year-on-year earnings declines since 2008/2009.
There is a bright spot, though. FactSet reports that analysts expect US corporate earnings growth to resume in the third quarter of 2016.
The situation in the US and Europe including the UK makes it difficult to pick a region. However, for investors who are determined to head offshore, on balance it would appear advisable to follow the money and opt for the likes of the DBX Tracker MSCI USA ETF.