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9. March 2016 23:16
by Irene
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February 2016 - Market Commentary

9. March 2016 23:16 by Irene | 0 Comments

It has been another eventful month – stock markets were down -7.2% (MSCI World Index in GBP) during the first half of the month, only to recover part of that at the later rally, the UK Prime Minister came back from Brussels with an EU deal to hold a referendum in June, and oil went down -22.0% (to $26.21) mid-month to finish at $33.75 per barrel and approximately flat for the month. From a macro-economic point of view, many countries are slowing down slightly, but the expectation for central bank intervention in Europe and Japan has increased again, offering some hope for investors.

United Kingdom

The FTSE 100 gained from the occurring Brexit fears and specifically internationally oriented and commodity and energy related companies gained on the back of it. It finished 0.9% up for the month. Amid the Brexit fears, the pound fell 1.7% against the US Dollar to its lowest level since 2009. The polls suggest that the vote will be close and this has contributed to volatility in UK asset prices.

Europe

The Eurozone faced some headwinds over the month. At first there was the question of how strong European banks are, with Deutsche Bank taking the lead in terms of negative headlines; Spain is having trouble to create its government, with potentially new elections in June; and inflation for the Eurozone came in at -0.2% for February. On the other hand, the Eurozone expanded at its fastest pace in 2015 at 1.5%. This did not help equity markets with the Euro Stoxx 50 loosing -3.2% in EUR (-0.7% in GBP) over the month. There is now a high expectation for Draghi to announce additional quantitative easing at the next ECB meeting on 10 March.

United States

In the United States, the Presidential race has fully and clearly arrived with a run for Presidency between Clinton and Trump looking fairly likely. Macro-economic releases in the US reinforced fears of a global slowdown with a decrease in consumer confidence, a slow-down in housing with housing starts declining, although the labour market data remained robust. The current volatility in markets coupled with a slow-down in a few parts of the world has pushed out expectations for the next rate rise in the US.

Asia and Emerging Markets

The Bank of Japan’s move to negative interest rates at end of January resulted in foreign investors selling stocks as doubts over the success of “Abenomics” outweighed the fundamentals. Both the Yen and the Japanese stock market fell. Emerging Markets as a whole fared better than Developed Markets with the MSCI Emerging Markets index down -0.2% in USD (2.1% in GBP), whereas Developed Markets equities (MSCI World) lost -0.7% in USD (1.5% in GBP). Expectations for stimulus measures in China contributed to a rally in commodity-linked stocks, making Brazil the best performing Emerging Markets country, up 6.3% in USD for the month. In Asia, Indonesia demanded that same title with a return of 5.8% for the month in USD.

Fixed Income

The volatility in equity markets has continued to benefit global government bonds. UK Gilts returned 1.4% in February and have generated a return of 5.4% year to date, definitely a good start to the year and a result of the more defensive positioning. Euro and US government bonds returned approximately 1% in their local currencies in February and around 3-3.5% year to date. High yield bonds had a comeback in February, after the sell-off in the first half of the month, but both Euro and US High Yield finished approximately flat for the month. There was a similar behaviour for Emerging Markets bonds, which gained around 1% in February in USD (3% in GBP).

Market Returns Overview



Source: Markit, Twenty20 Investments, as of 29 February 2016, all returns in GBP.

16. February 2016 17:32
by Irene
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Sustainable Investing here we come

16. February 2016 17:32 by Irene | 0 Comments

It is great to see that ETF providers have finally taken a larger interest in sustainable investments. More than one out of every six dollars under professional management in the United States—$6.57 trillion or more—was invested according to Socially Responsible Investment (SRI) strategies, according to a 2014 report from the US Forum for Sustainable and Responsible Investment.

The most recent SRI ETF launches were in fixed income; in July 2015 UBS launched the UBS Barclays MSCI US Liquid Corporates Sustainable UCITS ETF and iShares followed suit in January this year with the iShares Euro Corporate Bond Sustainability Screened 0-3yr UCITS ETF. This means that one can now provide multi-asset SRI portfolios just using ETF (there are another nine equity ETFs available in Europe covering different regions of the globe which follow similar company screenings). Let’s first look at the similarities of the two corporate bond SRI ETFs. The indices are both on corporate investment grade bonds and they both follow the MSCI ESG screening, which is based on questionnaires for each companies on Environmental, Social and Corporate Governance (ESG) issues. But that’s where the similarities end and it shows, again, that one really needs to undertake some due diligence on the underlying indices before one chooses to invest.

In terms of risk factors, the UBS ETF covers bonds issued in USD with the full maturity range whereas the iShares ETF covers bonds issued in EUR with a maturity of up to three years. So if rates are to go up at some point, the shorter maturity bonds from iShares with lower duration should react better. And, unfortunately, as it stands now, rates are more likely to go up in the US than in Europe. Another risk factor is FX. The iShares one carries the EUR-GBP FX risk, meaning if the Euro were to depreciate/appreciate against the pound, one could easily lose/gain more than what the bonds might return. The UBS ETF on the other hand is also available in currency hedged versions, providing a hedge to GBP, EUR, and CHF investors. In terms of sectors, the UBS ETF covers bonds in the Financial, Industrial and Utility sectors, with a high concentration in Industrials (79.5%). The iShares one is by comparison more diversified, covering all sectors with the highest sector being Financials at 54%.

Of course of particular interest is how one believes that the returns will look during the months ahead? Will rates rise, will there be a sell-off in the credit markets, will the sell-off in the equity markets be short lived, nobody knows for sure. The UBS ETF, which provides the full range of maturities, unsurprisingly has a higher yield to maturity of 3.45%, which currently stands at 0.52% for the iShares ETF which focuses on short maturity bonds. So it depends very much whether one believes that there could be more defaults in one region than in the other (one can definitely read more about potential higher defaults in the US) and which sectors the defaults might occur in (Industrials in the US versus Financials in Europe). Or could we even have a rate cut in the US instead of the next rate hike?

In terms of our in-house signals, they currently show a moderately bearish outlook for both asset classes. Maybe we need to wait until spreads have widened somewhat more and we get a better buying opportunity.

4. February 2016 22:30
by Irene
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January 2016 - Market Commentary

4. February 2016 22:30 by Irene | 0 Comments

The markets saw a very rocky start to the year 2016 with global equity markets (MSCI All Country World) down -10.5% before recovering partly to a loss of -6.0% in USD by the end of the month (-2.7% in GBP). China’s slowing economy and a further slump in oil added to the fears in markets, with Chinese equities being down -22.1% for the month and WTI Crude dropping to $28.4 (or -25.7%) intra-month only to finish off at $33.6 (or -11.9%) at the end of the month. The first rate rise in the US in December did not help to ease market jitters, especially when there is more talk now of the US being late cycle and whether it will head into a recession soon. This is on the back of the International Monetary Fund’s (IMF) World Economic Outlook in January downgrading global growth by 0.2% for both 2016 and 2017, to 3.4% and 3.6%, respectively.

United Kingdom

The FTSE 100, with its fairly high allocation to energy and commodities, followed the general trend in markets, being down -9.1% intra-month and recovering to a loss of -2.5% for the full month. The debate on a British in-out referendum with the EU added uncertainty, although the UK Prime Minister is trying hard to negotiate a better proposal. On a macro-economic front, news has been mixed, with GDP growth for the fourth quarter in 2015 coming in at 0.5%, as expected, and the economy now seeming to rely more on the services and retail sectors.

Europe

The QE-lite announcement from the ECB in December disappointed markets and did not help European equities at the start of the year with the Euro Stoxx 50 down -11.7% in EUR mid-month. Only after Draghi reiterated his whatever it takes and hinted that more might be done at the ECB meeting in March, did European equity markets finally rally, with the Euro Stoxx 50 gaining 5.8% and finishing the month at -6.6%.

United States

The Fed left monetary policy unchanged in January, as expected, and rephrased its stance slightly, that there might be rate increases, but that they would be dependent on economic data and gradual and the market is now pricing in only one rate increase this year.

Asia and Emerging Markets

Japan surprised markets at the end of January with a surprise deposit rate cut into negative territory, which helped to narrow the losses in equity markets worldwide. China is slowing down, but the official figures are still at 6.5%, which would be a very healthy growth rate. The question is how much of the growth China can keep up. Emerging Markets overall fared similar to Developed Markets, being down -6.2% in USD in January, recovering from intra-month lows of -13.0%.

Fixed Income

While equity markets took a beating, government bonds did well in January on the back of a defensive positioning as well as a policy driven rally towards month end after the dovish stance from both the Fed and the Bank of Japan. Gilts ended the month with gains of 3.6% and inflation-linked gilts returned 4.9%, while US Treasuries gave investors a 2.1% return. Global investment grade credit returns remained more or less unchanged, but high yield bonds in both Europe and the US lost around 1% and are now down for three consecutive months each.

Market Returns Overview



Source: Markit, Twenty20 Investments, as of 31 Dec 2015, all returns in GBP.

4. January 2016 12:17
by Irene
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December Market Commentary

4. January 2016 12:17 by Irene | 0 Comments

We are finally past the first rate rise in the US in nearly a decade. At the beginning markets reacted fairly okay to it, but some market jitters and profit taking was evident as we headed to the end of the month. December was also a month when oil (WTI Crude) dropped to nearly $35 and when the ECB, on the other hand, provided more stimulus and lowered interest rates further into negative territory. The latter did not bode well with markets as Draghi’s ‘whatever it takes’ promise in the weeks before meant that the market was disappointed with only a small dose of additional stimulus. Almost all equity markets finished the month lower in their local currencies, with global equity markets (MSCI All-Country World) down -1.8% in USD (0.2% in GBP).

United Kingdom

The FTSE 100, with its fairly high allocation to energy, expectedly was down -2.2%, while the FTSE 250 finished slightly up at 0.25% for December. Inflation came out positive at 0.1% in the UK and the unemployment rate is now down at 5.2%, which somewhat boosts wages, whereas growth slowed to 2.1% on an annual basis, down from 2.3% in the previous quarter. The word Brexit is now heard more and more in the news, increasing the uncertainty for investments in the UK. The time table for a referendum is not yet clear.

Europe

After being buoyed by the prospect of a much deeper QE in October and November, December started with a QE-lite from Draghi, disappointing investors in the Eurozone and further afield, with the Euro Stoxx 50 dropping -6.7% in December in EUR (-2.1% in GBP). Economic data in the Eurozone was largely encouraging, the purchasing managers’ index (PMI) increased for four months, finishing off at 53.2 for December and inflation on an annual level remained steady at 0.2%.

United States

The US has successfully implemented its first rate hike after a lot of back and fro in the previous months. The Fed has forecast that the economy in the US is strong enough to sustain another four rate hikes next year, which would bring us up to 1.5%. Markets first did not react too badly to the lift-off from 0.25% to 0.5% as the news was more or less priced in. With the US Dollar already quite high, there is still a question of how much a further rate hike could hurt export profits although the US economy looks quite healthy with the unemployment rate down at 5% and jobs growing.

Emerging Markets

For Emerging Markets the fear is that the US rate hike, with potentially four more to come, will increase their cost of borrowing in Dollars too much. For the month of December, China finished positively in local currency having gained 3.7% while Brazil was down -3.9%. The question is what the future growth rate for China will be with the official number standing at 6.5% and estimates ranging more around 4% with risks from an oversupply in manufacturing and property and the rising debt levels. Brazil will hold the Olympics later on in 2016 which should help get their economy back on course, but political woes have not helped in the past.

Fixed Income

In Fixed Income we saw the divergence between US and Eurozone sovereign yields deepen, with US government yields rising while those in the Eurozone declined. For the UK it meant that it might follow the US with a rate rise in the not too distant future, sending government and inflation-linked bonds down for the month. US high yield bonds were down another -2.4% as around 10-15% of this asset class are in the energy sector, with the low oil price increasing the risk of defaults in the shale gas exploration sector.

Market Returns Overview



Source: Markit, Twenty20 Investments, as of 31 Dec 2015, all returns in GBP.

18. December 2015 17:19
by Allan
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Twenty20's Top 3 Predictions for ETFs in 2016

18. December 2015 17:19 by Allan | 0 Comments

As we head into the last few days of 2015 it is time to have some fun and forecast what Twenty20 believes the top 3 trends in the ETF arena will be in 2016.

1. Active Managers Beware

After what feels like an eternity, 2016 will be remembered as the year when the ETF industry finally takes a bite out of the Active Management space. Indexed based strategies were the first to fall under the spell of ETFs, then came the Quant / Rule Based strategies that gave birth to the Smart Beta ETF phenomena, and we predict that an increasing number of active strategies will be re-born as ETFs in the year ahead. Vanguard, while not the first to offer active ETFs, fired the starting gun with the recent launch of their suite of Active Equity ETFs listed on the LSE. Expect more, many more well-known active managers nipping at their heels.

2. Financial Advisor Platforms Go Head-To-Head in the ETF Space

Financial Advisors in the UK have been slow to adopt ETFs in significant numbers, but this appears to be changing. As the rush to passive continues apace, a number of WRAP platforms (advisors use these to manage and oversee their client accounts) are feeling exposed. Novia recently re-vamped their ETF offering so we expect a mini arms race as WRAPs compete with each other to increase their service proposition around ETFs.

3. ETFs Develop a Conscience

Socially Responsible Investing is here to stay, but as a concept this aspect of themed investing has barely scratched the surface of the ETF eco system. That is about to change as more and more ETF providers suddenly get their calculators out once they realise that on a global basis over $24 trillion of assets currently resides in these strategies. UBS’s launch of a suite of SRI ETFs including a corporate bond ETF that follows the same company screening process and SPDR’s recent launch in the US with their fossil fuel-free ETF (ticker SPYX) is a case in point. Niche investment themes will drive the next wave of products.

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