ETF portfolio: slowing China hits returns

It’s three months since our global value ETF portfolio launched. Tom Bailey reviews its performance.

Our new global value exchange traded fund (ETF) portfolio has produced a negative return over the three months to the end of November. In total, the £8,000 portfolio was down to 0.87%, losing a total of £69 between 2 September and 2 December.

What was behind this disappointing result? The two worst performers were iShares MSCI Poland and iShares MSCI China, down 4.9% and 6% respectively.

At the root of China’s weakness was its continued economic slowdown. As Aneeka Gupta, equity and commodity strategist at WisdomTree, explains: “Macro-economic activity data deteriorated in October after showing an improvement in September.”

She points out that industrial production fell back to July 2019 levels, but other metrics fared much worse: retail sales growth came in at its weakest pace since 1999, while fixed investment’s yearly growth rate slowed to the lowest on record.

Chinese economic weakness also affected Germany, which contributed to slowing economic growth in Poland. Both Poland and China are now slightly cheaper, based on the their cyclically adjusted price-to-earnings (Cape) ratios.

Singapore also helped to drag the portfolio’s performance down, losing 1.6% over the period. The city state is one of the world’s most globalised economies. Weakness in global economic data and fears about the trade war make its relatively poor performance unsurprising.

Best-performing countries

Russia was the strongest portfolio performer, returning 2.8%. This was partly driven by supportive monetary policy, with Russia’s central bank cutting its key interest rate to 6.5% in late October.

The bank is expected to cut rates even further in 2020, says Gupta. She explains: “Russian policymakers appear to be placing more weight on economic growth rather than financial stability, and we expect both fiscal and monetary policy to contribute to their growth objective.”

Despite their relatively strong performance, Russian equities are still cheap. The market now sits on a Cape ratio of 7.8 times, slightly up from 7.3 times three months ago. Its dividend yield, however, remains an attractive 6.4%.

South Korea, meanwhile, produced the second-strongest return, at 2.7%. This came on the back of strong performance from technology stocks after expectations for smartphone and memory chip demand improved. Gupta notes: “Korean chip exports are likely to benefit from a turnaround in the memory cycle.”

At the same time, as with most other major central banks, the Bank of Korea is now in policy-easing mode, recently lowering its benchmark rate. This, combined with more planned fiscal stimulus, is expected to help stimulate economic growth in the country, says Gupta.

Positive performance also came from Greece, with the Global X FTSE Greece 20 ETF gaining 1.1%. Several factors aligned to support Greece’s equity market over the three-month period. First, Greeks brought to power a centre-right government. While the left-wing Syriza party had largely made peace with financial markets, investors clearly felt that the New Democracy party, led by Kyriakos Mitsotakis, was a safer bet. Greece has also continued to enjoy a pickup in economic growth, at 1.9% in 2019.

Beating emerging markets

How did the portfolio stack up against the broader market? Measured against the MSCI World index, our portfolio under- performed. The global market produced a total return (in sterling terms) of 0.3%, compared to our loss of 0.87%.

However, when compared to emerging markets, our results look slightly better (not all the markets in our portfolio are emerging, but many are). The MSCI Emerging Markets index returned -1.04%, marginally underperforming the global value portfolio.

Finally, because the purpose of the portfolio is to track “cheap” markets, it is also worth comparing it to the MSCI World Value index. This includes companies with relatively low valuations and high-quality characteristics; it returned 1.1%. But our portfolio is based on a long-term strategy. While cheap markets can be expected to rebound over time, more bad news may also push them lower in the shorter term.

Russia, Korea and Greece bright spots for returns

Country Fund Ticker Cape ratio of index Current value (£) Starting value (£) Total return (%) Gain/loss (£)
Greece Global X FTSE Greece 20 ETF GREK -3.2 1,015 1,004 1.1 10
Russia HSBC Russia Capped ETF HRUB 7.8 1,024 996 2.8 28
Turkey iShares MSCI Turkey ITKY 7.6 1,003 996 0.7 7
Poland iShares MSCI Poland SPOL 11.2 956 1,005 -4.9 -49
South Korea iShares MSCI Korea IKOR 12.1 1,043 1,016 2.7 27
Spain Amundi ETF MSCI Spain UCITS ETF CS1 14 982 999 -1.8 -17
Singapore iShares MSCI Singapore Capped ETF EWS 14 984 1,000 -1.6 -16
China iShares MSCI China A UCITS ETF IASH 14.5 939 999 -6 -59
Total       7,949 8,018 -0.87 -69

Note: Portfolio comprises the eight most undervalued markets in the world in terms of Cape ratio as at start of September 2019. Portfolio runs without adjustment for one year and is then rebalanced. Source: Market data from Sharepad, as at 2 December 2019. Portfolio launched on 2 September 2019. Cape ratios from StarCapital, values as at 31.10.2019

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