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Rockanomics
ROCKANOMICS - July 2016
“There’s an app for that!” goes one of the more popular catchphrases of the 21st century! But there’s another one you may have heard of, one more specific to the financial world – “there’s an ETF for that!”
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What was?

These are high times indeed. Not of the green and medical kind but of the equity market variety as American stock indices clipped all-time highs in July (what Brexit??). The holy trinity of the Dow, S&P 500 and the NASDAQ were up between 2.7% and 6.6% for the month. Technology, health care, materials & utilities (risk-on and off assets effectively – no discriminating this time and even with a weak 2nd quarter GDP print) were the primary drivers to such giddy heights.

The rest of the world, while unable to match the reach of the U.S. markets, still managed a healthy positive finish for July. Global stocks as measured by the MSCI All Country world index went up 3.5%. European large caps returned the same but are a long way off their post 2009 high (22% to be exact). With negative rates crushing bank margins and stoking the fire on another Euro banking crisis (Germany’s mammoth Deutsche Bank under major duress and Italy’s major banks in dire need of a bailout), EU dissolution fears, geopolitical/terrorism issues and the refugee crisis, a European Dysfunction (more than a Union) is how the continent is best described at the moment.

Asia was ahead 4.6% and is now at its highest point for the year. Emerging markets closed in the green as well but remain 15% off their April 2015 highs.

The ASX 200 continued to impress in July, notching a 6% return and is officially ahead for 2016. The consumer staples (and discretionary) and healthcare sectors did a lot of the heavy lifting for the month while energy, technology and telecoms failed to excite. The Aussie dollar went up and down a hill but finished ahead 0.9%. This one refuses to go the way of market pundits!

Commodities fell a sharp 6% in July after a 5 month trek upwards. Oil, which we said was already showing a lack conviction after a multi month surge, proceeded (predictably, some might say if you were going by the last two Julys) to tumble sharply. With OPEC’s continued refusal to make meaningful cuts, falling refinery demand and Iranian (and now Libyan) oil production back online, energy bulls could be stuck in an oil slick for some time. Precious metals continued to be the clear winners in this asset class, rallying on from last December. Equities may be clipping new highs (in some places) but a noticeable appetite for safety is also growing. The demand for bonds is continuing unabated as 10 year US Treasury yields plumbed record depths while yields turned negative on some corporate and emerging market debt! According to Bank of America Merrill Lynch, there is now more than USD 13 trillion of global negative yielding debt. There was none in mid-2014.

At Private Wealth, it was positive month across fixed income, property and equity allocations. Aussie micro, small and midcap investment managers trumped all in July, up 8% on average and our conviction in these sectors continued to pay dividends for our clients.

What now?

Recent data from Reuters has pointed to 17 straight weeks of US stock and mutual fund outflows. So the logical question would be “How then are stock prices still going higher and higher?” Bank of America Merrill Lynch fund flow trackers has seen more than 6 months of net (stock) selling by its institutional, private and hedge fund client base. “Who on earth is buying stocks then?!?” we hear you scream. We decided to do a little digging on his head-scratching enigma. And a major contender for the answer………………central banks!

According to Bloomberg, the Bank of Japan (BOJ) is a top 10 holder of 90% of the stocks that comprise the benchmark Nikkei 225 index and as per its expansionary mandate, now owns 55% of local exchange traded funds. The BOJ aren’t shy about this either, disclosing this regularly via their policy minutes. The Swiss National Bank, as per its regulatory filing in the second quarter, has effectively upped its holding of U.S. equity by 50% in the last 6 months alone and is now the owner of $62 billion of American stocks (Apple and Exxon being the top 2 favourites apparently). The U.S Federal Reserve refuses to be audited. One must wonder why. An analysis by Citigroup has demonstrated a tight correlation between central bank asset purchases and equity gains particularly over the last two years.

Weren’t these guys just supposed to mandate interest rate policy for the greater economic good (and maybe print a few bucks now and then to stimulate inflation and growth)? Is this even legal?!? We’ll leave that one to the lawyers, but here’s what one can do in the face of such unprecedented action. This equity rally could very well continue regardless of the underlying economic fundamentals if central banks, with their fondness for money printing, keep gobbling up stocks. “Don’t fight the Fed” as the old stock trading mantra goes. However, political will may have a more finite limit than a printing press. And this is what investors will have to be even more mindful of than ever.

Never has it been more imperative to keep a heavy finger on the defensive and as we at Private Wealth have been doing for some time, to only keep your hand in the quality cookie jar. A little more caution going up the mountain should be warranted at such altitudes.

What's that?!

“There’s an app for that!” goes one of the more popular catchphrases of the 21st century! But there’s another one you may have heard of, one more specific to the financial world – “there’s an ETF for that!”

Exchange Traded Funds (ETF). Our learned friends at Investopedia have it described as “a marketable security that tracks an underlying index, a commodity, bonds, or a basket of assets” and that which “trades on a physical stock exchange” much like the common share. An ETF owns these underlying investments and the investor will purchase units or shares in the ETF to gain exposure to particular assets.

Traditionally marketed as low-cost and passive (index tracking), the proliferation of new ETFs over the last decade has led to a marked rise in highly sophisticated and strategy specific ones. Typical vanilla ETFs include local benchmark index (in case you run out of time to buy every single stock in the ASX 200 in the exact proportions) or sector specific, government debt focused, currency type or just one that tracks the price of oil even (since barrels of the stuff in your garage typically raise a few disapproving eyebrows in the neighbourhood).

Then there’s the downright oddball! Think Tesla is overhyped but convinced electric cars (powered by lithium batteries) are taking over the world? There’s the Global X Lithium ETF. Love your pork and beef and think the rest of the world can’t get enough of these alpha meats? IPath Bloomberg Livestock ETF. Vegans please looks elsewhere. A fan of Tennessee whiskey, country music and all things Nashville? LocalShares Nashville Area ETF ya’ll hear! Have no idea which ETF to buy? There’s an ETF for that even!

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