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2. October 2015 16:11
by Allan

Should European Equities be included in your client portfolios?

2. October 2015 16:11 by Allan | 0 Comments

At the risk of over simplification, it seems investors now operate in a world of excessive over reaction. In a battlefield, where a FTSE 100 company (Glencore) can close down 30% in one single trading session, momentum traders probably stand a fair chance of outperforming any macro driven investor, and likewise a buy and hold strategy is one way of ignoring the noise. But eventually the performance of the equity markets has to marry up with the rules of 101 economics.

At Twenty20, we analyse the rates of change of the Purchasing Managers Index, known as PMI, for each European country along with the Composite Leading Indicator as published by the OECD for each country and region. The most recent economic statistics for Europe have just been published, with France holding steady at 50.6, Germany at 52.3 down slightly, and with Spain and Italy down the most at 51.5 and 52.7 respectively. This is somewhat muted to earlier in the year but reasonable nonetheless as most European PMI numbers are above 50, signalling economic growth.

While the absolute level of these indices is not always a reliable guide for the performance of a country’s equity markets, the rate of change of this data usually provides a slightly more accurate way to determine the trend. In the hart below we show how the changes in PMI have evolved over the last 12 months for a select number of European equity exposures that we would like to invest in via an ETF. The numbers are normalised and in broad speak are the units of standard deviations of change. The numbers for the column labelled Sep-2015 relate to data typically published by the end of September, or indeed the start of October. On this basis, only France is showing an acceptable score of 0.79, with all of the others near zero or negative.

European PMI signals, source: Twenty20 Investments, 1 October 2015.

Likewise in the second chart, we examine the monthly changes of the published OECD CLI statistics and can see that Germany, despite its recent woes, offers the most positive growth prospect within the Eurozone.

European OECD CLI signals, source: Twenty20 Investments, OECD, 1 October 2015.

So what next?

So where does this leave us? Making investment decisions only using macro-economic data is a dangerous game and as a rule one would want to supplement this with some market data, such as a risk on / risk off signal or your favourite technical analysis signal, but either way it feels much harder deciding whether to invest in Europe, much harder than it did at the start of the year.

As the proponents of investing in European equities head into the last quarter of 2015, one can only ask where did it all go wrong and ask how we got to this point. In late January, Mario Drahgi announced a bigger than expected Quantitative Easing programme, which went live on March 9th, and within no time the European equity markets were on a roll. By the time the Dax peaked at 12,374 on 10th April, investment managers from one end of Europe to the other were high fiving each other, safe in the knowledge this was a great example of their skill and market timing like never before.

Little did they know that, on this occasion, this wasn’t strictly true. Greece, not for the first time, was to lend its name to the now infamous parlour game of ‘pass the bailout out bill’, and before long the whole euphoria that came with QE was nowhere to be seen. If the European drama would have stopped there and then, normal service might have resumed. Let’s not forget only a few weeks earlier it was the turn of the Swiss to upset the apple cart with their somewhat rash decision to remove the CHF currency peg against the Euro. On a YTD basis, the chart below shows that only Italy’s equity market, as a peripheral, has lived up to its promise with a total net return of 9%.return. By contrast Spain was a real laggard returning a loss of nearly 9%, with Germany coming in a close second losing 6%.

Year-to-date performance for DAX, FTSE MIB and IBEX, source: Bloomberg, 1 October 2015.

Of course by late summer, everybody had got somewhat hardened to the antics of Central Banks, as most noticeably demonstrated by the erratic behaviour emanating from China and the US. However, by the time September had come and gone to that list we could add Volkswagen, which perfectly demonstrated what is meant by idiosyncratic risk, and by now all bets were off. For that reason a regional bet might be one’s best option rather than taking single country risk. Who said the life of an investment manager would be easy?

17. September 2015 14:50
by Allan

Is it time to re-consider Emerging Market equities?

17. September 2015 14:50 by Allan | 0 Comments

For quite some time now the process of building a multi-asset portfolio has become an increasingly difficult task. For most of the last five years the returns from commodities have been best avoided. And allocating to Fixed Income has not been without its problems either. For example in February, UK gilts and inflation-linked bonds were both down in the region of 5%, hardly what you expect from a ‘low’ risk asset. As for investing in Emerging Markets Equities, with the exception of Eastern Europe, this has hardly been one of the more enjoyable car crashes of the last 6 years. As ever, what the Lord giveth the Lord taketh away.

With the recent sell-off in EM currencies, the equity markets of many EM countries – from Brazil through to Turkey – have followed suit, resulting in significant losses. This simple fact, coupled with the realization that the days of a zero-rate Fed policy will be soon behind us, suggests a fresh look as to whether Emerging Markets equities now offer a good re-entry point.

Fed Fund Rates versus Emerging Markets

Looking at the big picture, it is quite interesting to see the impact of the Fed’s policy over the last ten years by comparing the Fed Fund Target Rate with the MSCI Emerging Markets Index. The chart suggests the Fed’s zero-rates policy has not been kind to Emerging Markets stocks.

Fed Fund Target Rate vs. MSCI Emerging Markets Index, source: Bloomberg, 16 September 2015.

It is tempting to infer that a raise in US interest rates could be one of the catalysts that drives the recovery in Emerging Markets. In the short term this is unlikely to be the case, but looking further out, on a six months or one year horizon, if looking at the rolling one year returns for a number of ETFs is anything to go by, then it does suggest a turnaround might be on the cards.

Emerging Markets Performance

For example, UBS’s ETF which tracks the MSCI Emerging Markets Socially Responsible Index, ticker UC79, shows a very distinctive turning point in the one year rolling return as of late. Likewise, the Amundi MSCI Emerging Markets ETF, shows a similar reversal.

Rolling one year performance for UBS’s MSCI EM Socially Responsible ETF benchmark, source: Twenty20 Investments, Markit, 16 September 2015.

Rolling one year performance for Amundi’s MSCI EM ETF benchmark, source: Twenty20 Investments, Markit, 16 September 2015.

This time it does feel different as the global investor base assesses the dangers that accompany a China stock market where too many stocks are suspended from trading in the markets. For this reason alone the best stance is to stand on the side-lines until this story runs its course, but increasingly it looks like Emerging Markets equities may come back into play.

4. September 2015 16:22
by Irene

August Market Commentary

4. September 2015 16:22 by Irene | 0 Comments

August should have been a quiet months, but despite some sun there was no calm in the markets. Having finally moved past the Greek odyssey, a debt-fuelled Chinese stock market together with plummeting commodity prices kept investors panicking. The Chinese government tried to prop up markets for a while, but didn’t really succeed – although the downturn could have gone much further. Global equities finished the month between 6% and 22% down.


Chinese equities finally erased all the gains for the year in late August, dropping the most since 2007. This comes despite Chinese policymakers’ efforts to stimulate the economy through expansionary monetary policy and a devaluation of the Yuan currency. Having returned more than 100% in less than a year, Chinese equities had been in bubble mode and that bubble needed to burst. The problem is that a lot of the buying has been built around leverage, which is much harder to unwind and mostly does not happen without some tears. The cool breeze from China could be felt all over the world. As the CSI Index is still up 43% over the last year, the drop could go further.

Emerging Markets

Besides leverage, there is another factor to watch for China, which is its reserves. The People’s Bank of China has been offloading Treasuries and buying Yuan to support the exchange rate. It is estimated that this policy has contributed to a $315bn drop in China’s foreign-exchange reserves over the last year (from a level of around $3.99tr in 2014). The sales of US Treasuries has the same quantitative tightening effect as the US rate rise. Many of the Emerging Markets countries followed China downwards. The worst performing countries after China were Malaysia and Brazil, in both cases more fuelled by politics. The MSCI Emerging Markets Index is down 9% for August and 14.7% for the year.


Over in Europe, Germany had one of the worst months ever in August with a fall of 9.3% in the DAX. The main losers were automakers due to the decrease in car sales in China. But not all is doom and gloom in the markets and the slump seemed a slight overreaction. The economy for Germany looks positive, with retail sales, business confidence and factory orders up. There is of course the question how much a Chinese slowdown will impact the export-driven German economy, but the manufacturing sector expanded at its fastest pace in more than a year. Unemployment figures for the Eurozone in general were slightly down. Spain’s and Italy’s economy are doing better, but France is in stagnation. Greece is expecting its third election for this year at the end of September with a close call on whether Syriza will win again. UK growth picked up pace in the three months to August but similar to Germany, the economy faces risks from the knock-on effect of turbulence in China. Talk about a rate hike in the UK has more or less subsided and Sterling was down 3.9% against the Euro and 1.8% against the Dollar as a result of it.


In the US, all eyes are yet again on the Fed. Economic data was mainly positive with US productivity rising 3.3% in the second quarter, employment up and the PMI manufacturing index above 50, at 51.1, but lower than the last few months. With the pending Fed rate rise, bad news in the US sometimes seems to be good news for equities and good news bad, as there has been lots of discussion of ‘will they or won’t they’ for a September rate hike.

Fixed Income

Fixed Income took a different stance in August. With equity markets tumbling, governments bonds were up mid-month, but US and UK rates finished more or less flat at the end of the month with the risk of a rate hike pending. Corporate and high yield bonds were down slightly on both sides of the Atlantic. Emerging markets bonds, similar to their equity counterparts, did not fare well.

Market Returns Overview

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

23. July 2015 06:16
by Allan

Half hedged or half baked?

23. July 2015 06:16 by Allan | 0 Comments

Today I read that IndexIQ has launched a trio of 50% Currency-Hedged ETFs, citing leading edge research that shows this is a good thing to do. 

A world first, nonetheless but I do await the next world first when another boutique ETF provider offers a 30% hedged ETF.

In the meantime we have been busy at Twenty20 designing an infinite family of partially hedged ETFs by simply taking a weighted combination of a hedged and an un-hedged ETF .  For example as a GBP investor, to implement an x% hedged exposure to the S&P 500, after ‘extensive’ research we have found that by deploying x% of our capital in the db x-trackers S&P 500 UCITS ETF 4C (GBP hedged) and the remaining (100% - x%) in the Source S&P 500 UCITS ETF we have managed to achieve our goal for an effective blended TER of 30bps * x% + 5bps * (100 – x)%.


2. July 2015 10:18
by Irene

The peculiar consequences of a Greek default

2. July 2015 10:18 by Irene | 0 Comments

We have heard so much news about Greece and the famous question of ‘will they or won’t they’ default that I do not want to add to this part of the discussions. Instead, I wanted to focus on some of the peculiarities that the potential Grexit has brought to the table.

Crowdfunding to help Greeks

Firstly, a crowdfunding website has been set up to help the Greeks - no strings attached, except for a few post cards and a bottle of wine. When I heard about it, I loved the idea. How gratifying for the Greek people to think that not everybody is against them. As it currently stands, at 10:09 BST on 2 July, more than €1.3m has been raised so far and more than 75,000 people have donated. A good and very charitable start.

But here comes the catch. The target for the crowdfunding is €1.6bn, which means only 0.08% of the target has been reached so far. If each citizen in the Eurozone were to donate €5, we would just about reach the target. But this includes children and pensioners, so it is probably around €10 per working person. Now I think many people would be perfectly okay to pay €10 to help the Greek people.  Unfortunately, it is not that simple. The €1.6bn payment to the IMF is only one out of many required for Greece. There is another €4bn coming soon in July, €0.5bn to the IMF and €3.5bn due to an ECB bond maturing and the total Greek debt is estimated at around €340bn. To me, these numbers show the sheer scale of the problem and why we probably need institutions like the IMF (and the ECB in this case too) to be able to deal with it.

No more Apple cloud in Greece

The consequences of capital controls in Greece are reaching much further than what I would have imagined. Outsourcing your IT or data functions seems quite normal these days. But on June 30,  Apple customers realized that their cloud solutions were not working anymore. Even though some of them only cost €0.99 a month. I am hoping that an entrepreneurial Greek will have a better solution here. Or that Apple will – yet again – bow down to customer’s demands and do the right thing; override the immediate subscription cancellation and let Greeks have it for free for a month or so. Come on, Apple, you bowed down to Taylor Swift and poor musicians, you can do it again.

Hedge fund managers not worried

And something that worries me is that hedge fund managers don’t seem to be worried. At least so a story says, including fund managers at BlackRock and JPMorgan. Personally, I think a resolution between the troika and Greece is more likely than a Grexit. But I am definitely worried. And so seems the rest of the market. The VStoxx, a measure of volatility in Eurozone equities, was at 32.5%, from a level of around 15% a year ago. But then this is nothing compared to a value of around 50% in 2011, or more than 80% in 2008. Did I miss something? Is it really that less likely that Greece will default now than in 2011? There is still a non-negligible tail risk in my opinion. And if the market is not prepared for it, then this could have dire consequences. Let’s face it when we get there, but I would say better safe than sorry.

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