Antoine Lesné (pictured), EMEA Head of SPDR ETF Strategy & Research, has written a research note suggesting that ETF investors would do well to consider an exposure to Low Volatility ETFs, the sterling bond market, as well as Utilities and Telecoms sectors.
Lesné writes that market leadership has continued to evolve over the last couple of weeks, with defensives gaining a firmer footing amidst a pick-up in volatility.
“As pockets of the equity market are becoming stretched and the earnings story has been largely digested, top-down drivers are reasserting themselves on price actions in sectors. Utilities and Telecoms have benefited from this rotation in the market with the latter having had depressed valuations owing to headwinds faced by the sector. The much-anticipated OPEC production cut extension did more to support crude prices before the announcement as prices slid at the end of the week, leaving no meaningful read-through on the energy sector.”
Lesné also comments that the short, sharp spike in implied equity volatility (as seen by the move in the VIX Index) has brought attention back to the ‘Volatility factor’ over the last two weeks.
He writes: “Low Volatility, Minimum Volatility and Minimum Variance funds have suffered outflows year to date, but with reasonable valuations and an equity market priced for perfection, investor demand for these lower-risk options could return. As in previous weeks there wasn’t a significant dispersion between the performance of different factors, with more interesting moves between countries (for example, the impact of political risk on markets in Brazil) and sectors.”
Turning to fixed income, Lesné observes that inflation expectations keep falling but should not deter the Fed to hike at its next meeting. “While Brazilian Real volatility spiked as President Temer’s fate will further delay much-needed reforms, inflows continued into the broad emerging market debt exposure. Brazilian government bonds rapidly retraced after falling heavily on 18 May. Month-to-date performance has been positive, defeating the seasonal May emerging market weakness. Spread exposures in US dollars have outperformed; meanwhile, Euro High Yield spreads tightened almost 50 bps since the first round of the French Presidential Elections, to 275bps. Carry on for now! Also, the sterling bond market saw strong performance during the past two weeks, where spread duration was a key driver.”