Markets are in limbo between feverish optimism and the cautious intimations of increasingly hawkish policymakers, with the recovery trade continuing to run hot, transitory inflation expected to continue to year-end and central bank tapering set to commence in 2022
A recent global equities outlook from Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, noted earnings and valuations could continue improving, depending on factors such as the relative strength of the US dollar.
However, Adams said given US equities’ triumphant start to the year, lofty valuations, policy discussions around taxation and monetary tightening before other countries could all see S&P 500 constituents left behind in the not-too-distant future.
Following May data showing US core inflation rose 5% in a year, the fastest pace of growth since 2008, some 13 of the Federal Monetary Committee’s 18 members now expect at least one interest rate hike before the end of 2023.
With the US firmly at the bottom of Bloomberg Intelligence’s equity scorecard for the second half, other developed regions and segments of emerging markets show the most promise. Based on this, ETF Stream has selected five ETFs that could deliver strong returns in the second half of the year.
Starting the list is the Amundi MSCI Emerging Markets Latin America UCITS ETF (ALAT). Tracking the performance of large and mid-cap Latin American equities, ALAT is the best-performing in its product class so far this year and its total expense ratio (TER) of 0.20% is a third of the price of its next-cheapest counterpart.
Being 25.2% exposed to materials and 8.9% to energy stocks, ALAT will continue to benefit from the reflation trade while it prevails, with Latin American equities historically among the best-performing amid periods of high-inflation, according to Bloomberg Intelligence. At present, less than 20% of the MSCI All-World index trades at below-average valuation, with Latin American equities among the only geographies remaining cheap.
Claiming a significant 65% stake in the ETF, Brazilian equities are three times as well as the next-most-represented region – Mexico.
Both countries’ product managers index scores remain in contraction territory, signalling room for improvement. Meanwhile, inflation running relatively hot in Brazil could set a backdrop for relatively strong equity returns as the country emerges from its delayed efforts to suppress the COVID-19 virus.
The next strategy is the SPDR MSCI Europe Small Cap Value Weighted UCITS ETF (ZPRX), which is not only among the lowest-fee products in its class, but is also based on a value-reweighted iteration of the MSCI Europe Small Cap index, which is the most diversified out of those offering European small cap exposure..
Due to its value tilt, ZPRX has a 31.7% tilt to UK equities which have been undervalued since Brexit and even since the low-interest-rate epoch began over a decade ago.
Now, in a recovery period with rising inflation, UK small caps will benefit from the country’s vaccine roll-out and the reopening of the UK’s domestic economy. Furthermore, value picks – especially financials – will benefit from future hikes in interest rates.
In the meantime, Bloomberg Intelligence has placed Europe at the top of its equities scorecard as it expects economic and earnings momentum, as well as currency strength, to remain in the continent’s favour.
Bloomberg Intelligence added “embracing cyclicals is the way to go in H2”, with energy materials and consumer discretionary sectors retaining positive outlooks and retaining a combined weighting of 22.5% within ZPRX.
The third pick is the newly launched Invesco MSCI China Technology All Shares Stock Connect UCITS ETF (MCHT) which undercuts its incumbent’s fee by 24bps and offers exposure to 100 tech stocks in China.
Following what ended up being a worldwide growth stock turndown between February and May, Chinese tech equities saw their valuations cut far more sharply than competitors in other geographies – largely owing to continued and legitimate concerns around political tensions and state oversight.
Reflecting the impact of these concerns, the HS Tech and CSI Internet indices from Société Générale have fallen by 31% and 36%, respectively, from their February highs.
At present, Chinese equities are among the highest proportion trading at discounts to five-year averages, with the tech sector’s valuations returning to October 2014 levels, while three-year forward compound annual growth rate of earnings per share has remained stable at 43%, SocGen said.
Following the slump, the country’s tech industry is trading at an average of 32x price-to-earnings, some eight points below pre-dip levels.
The next entry is the Airlines, Hotels and Cruise Lines UCITS ETF (TRYP) which launched earlier this month. As the first travel industry pure-play ETF available to European investors, courtesy of HANetf, TRYP replicates the performance of Solactive’s Airlines, Hotels and Cruise Lines index.
With a TER of 0.69%, TRYP offers direct exposure to the recovery of the global travel industry. Also, although most many airline stocks have fallen since the UK pushed back its ‘Freedom Day’ and moved more countries onto its restricted list, HANetf said leisure travel is expected to see a year-on-year uptick of 41% during 2021, alongside a 21% recovery in business travel.
Crucially, TRYP avoids the mistake of its predecessors, which offer exposure to other industries such as gambling and other leisure activities alongside air travel. Among its 61 constituents, TRYP offers 44.6% of its coverage to airlines, 39.8% to hotels and 15.6% to cruise lines – so serves its purpose as a high-conviction play for the (eventual) return to life without COVID-19.
5. iShares UK Property UCITS ETF (IUKP)
Finally, we have the iShares UK Property UCITS ETF (IUKP) which offers direct exposure to UK real estate investment trusts through the FTSE EPRA/NAREIT UK Property index.
Benefitting from pent-up demand for property purchases and the UK government’s stamp duty holiday, IUKP has returned 19.7% since the UK first launched the scheme last July.
With economies around the world recovering and buying activity being brought forward by the stamp duty exemption deadline, the average UK house price has shot up almost 11% in a year.
Beyond benefitting primarily from house sales, IUKP’s outsized 20.6% weighting to Segro alone – among other REITs – has benefitted from investors looking to diversify their sources of income by looking to alternatives during a hunt for yield.
Similarly, REITs such as Segro also act as a good way to express a recovery trade conviction, as they not only own the properties occupied by leisure and services outlets such as restaurants, casinos and cinemas, but also commercial real estate such as warehouses, which are capitalising on the scramble for logistics and storage for essential components.
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