Tom Bailey reflects on the dire effects the uncontrolled coronavirus pandemic has had on the ETF-based value portfolio.
These have not been a good three months for our global value ETF portfolio, which fell in value by 6.9% between 2 December and 2 March. The total return since purchase at the start of September 2019 is also down, by a disappointing 7.7%.
No one will be surprised that the primary reason for the poor performance was the coronavirus pandemic. Covid-19 first emerged as a risk in January 2020, but it was only in late February and early March that there were significant sell-offs in world markets as the potential impact of the virus and of government measures to counter it became apparent. This review doesn’t paint a pretty picture of the three months to 2 March. What’s more, it doesn’t reflect the dramatic market declines seen in March.
Reversal in Russia
In terms of country exposures, Russia was one of the worst-performing constituents in the portfolio over the three months to 2 March, with the spread of the virus sparking a major decline in energy demand. Our HSBC Russia Capped ETF lost 11.5% of its value. This is a sharp reversal for the fund compared with the preceding three months, during which it returned 7.8%.
Aneeka Gupta, associate director of research at WidsomTree, says Russia’s central bank responded by cutting its key rate from 6.25% to 6% in February and signalling that it is prepared to make further cuts. However, oil – and therefore Russian equities – took a further hit later in March, following the failure of OPEC to agree on oil production cuts.
South Korea has also been badly affected by the coronavirus outbreak. It has a trade-driven economy that struggles when global demand is weak. Moreover, the country has suffered one of the largest outbreaks of the virus outside China. Despite these headwinds, our iShares MSCI Korea ETF gained 0.8% over the period. Since purchase, the ETF is up 3.4%. But again, the current sell-off spike is not reflected in these figures.
In contrast, coronavirus damage is very apparent in the performance of our iShares MSCI Singapore Capped ETF over the period. The index tracker lost 7.8% of its value. Gupta says: “Fears that the Covid-19 outbreak would spread dominated investors’ minds at the start of 2020.” The Singapore government announced a generous stimulus to support businesses, but the city state still faces the prospect of a slowing global economy and a domestic demand shock.
Gupta adds: “The Singapore Tourism Board estimates that visitor numbers could fall by 25-30% in 2020, compared with 15% during the 2003 Sars outbreak. The Restaurant Association of Singapore expects a 50-80% decline in sales among food and beverage operators.”
Considering how much the coronavirus outbreak has weighed on our portfolio, it is surprising that the best-performing portfolio constituent was the iShares MSCI China A UCITS ETF. The index tracker returned 11.6% over the period under review. In the three months that preceded it, China was the principal drag on returns from the portfolio.
There were sharp falls in Chinese equities in January. However, Gupta says: “The market has been quick to snap back, as investors have gained reassurance from a stabilisation in the number of Covid-19 cases emerging in China, coupled with monetary and fiscal stimulus from the Chinese authorities.”
The crisis appears to have peaked in China and business sentiment is improving there. However, depending on the damage to the rest of the world’s economy as the virus goes global, that could soon decline again.
All of this disruption has made many of the markets we track cheaper. Russia’s Cape ratio, for instance, has fallen from 7.8 times to 6.9 times. However, that doesn’t help a portfolio such as ours that has no extra cash to invest.
Will performance improve? As already mentioned, this review does not cover the period when the worst effects of the coronavirus outbreak so far were felt. It is anyone’s guess what damage to the global economy our next portfolio update in early June will reveal.
Challenges on all fronts for undervalued markets
|Country||Fund||Ticker||CAPE ratio of index||Current value||Starting value||Total return
this quarter (%)
since launch (%)
since launch (£)
|Greece||Global X FTSE Greec 20 ETF||GREK||-2.4||790.71||£1,004.81||-22.10%||-21.90%||-£221.81|
|Russia||HSBC Russia Capped ETF||HRUB||6.9||906.91||£996.03||-11.50%||-9.50%||-£94.86|
|Turkey||iShares MSCI Turkey||ITKY||7.6||899.93||£996.45||-10.70%||-10.20%||-£102.18|
|Poland||iShares MSCI Poland||SPOL||9||829.08||£1,005.55||-13.40%||-18.00%||-£182.52|
|South Korea||iShares MSCI Korea||IKOR||11.5||1052.09||£1,016||0.80%||3.40%||£34.89|
|Spain||Amundi ETF MSCI Spain UCITS ETF||CS1||13.6||967.8||£999.96||-1.60%||-4.00%||-£39.96|
|Singapore||iShares MSCI Singapore Capped ETF||EWS||13.1||905.01||£1,000.64||-7.80%||-9.80%||-£97.88|
|China||iShares MSCI China A UCITS ETF||IASH||14.7||1,051.50||£999.30||11.60%||5.10%||51.15|
Notes: The portfolio comprises the eight most undervalued markets in the world in terms of Cape (cyclically adjusted price/earnings) ratio at launch on 2 September 2019. Portfolio runs for 12 months without adjustment and is then rebalanced. Sources: Market data from Sharepad, as at 2 March 2020. Cape ratios from StarCapital, as at 10 March 2020.