The situation for the diversified private investor
The ECB has finally raised rates in earnest in the face of rising inflation in the third quarter of 2022. This decision, while necessary, adds to the risks investors face from the pandemic, supply difficulties, inflation and the war in Ukraine.
Capital markets are facing major challenges and the change in central bank interest rate policy, most recently by the ECB, is putting equities under increasing pressure. Rising interest rates could thus have a rather negative effect on the acquisition of capital by companies and thus on the economic recovery resulting in a threat of falling stock prices.
On the other hand, bonds are not an alternative and do not look promising now: corporate bonds in general have too low a yield to compensate for the risk of deteriorating credit quality. And long-term government bonds carry too much risk at the moment, given the evolution of inflation (at a reduced level in the US, but likely to last) and the low level of interest rates.
Despite these risks, diversification of financial investments is more important than ever and the private investor will have to keep a passive investment focus. In view of the distortions of a single investment in a global fund, a combination of several ETFs with a considered weighting seems to be the best option.
Following the main ratios of ETFs retrieved in the IBKR GlobalAnalyst (which will be the subject of a separate article) and the forex levels, you can identify good entry points into regions and currencies.
Currencies
In the developed world, the GBP and YEN remain weak against the USD. In Asia, most USD vs. local currency peers are at multi-year lows. For instance, export weakness has weighed on the Chinese yuan, which has depreciated and approached the 7 per dollar mark. Yuan weakness may persist in the near term due to continued and broad-based dollar strength, providing a possible attractive entry point.
Attractive ETF prices by region
According to the IBKR GlobalAnalyst in September, emerging markets, China, and Russia (for Russia, it seems obvious that an attractive cheap price is not necessarily an attractive investment) offer attractive prices based on P/E ratios, and other markets could be considered.
Specifically for iShares and Vanguard, all the following ETFs have P/E ratios below 20 according to IBKR GlobalAnalyst:
- For iShares: iShares Core FTSE 100 UCITS ETF (Ire.), iShares MSCI Canada ETF (US), iShares China Large-Cap ETF (US), iShares MSCI United Kingdom ETF (US), iShares MSCI Japan ETF (Aus.);
- For Vanguard: Vanguard Core FTSE 100 UCITS ETF (Ire.), Vanguard Canada All Cap Index ETF (Can.), Vanguard FTSE All-World High Div Yield UCITS ETF (Ire.).
Considering the growth outlook (PEG), Latin America and Turkey are generally attractive. ETFs from iShares and Vanguard with a PEG below 0.4 generally cover the same ETFS with a high P/E, i.e. taking growth into account does not fundamentally challenge the simple P/E analysis (except, for example, for South Korea which is not as cheap but whose ETF constituents have seen strong earnings growth resulting in an attractive PEG).
- For iShares: iShares Core FTSE 100 UCITS ETF (Ire.), iShares MSCI Canada ETF (US), iShares South Korea ETF (US), iShares MSCI United Kingdom ETF (US);
- For Vanguard: Vanguard High Dividend Yield Index Fund (US), Vanguard FTSE 100 UCITS ETF (Ire.), Vanguard FTSE 250 UCITS ETF (Ire.), Vanguard FTSE All-World High Div Yield UCITS ETF (Ire.), Vanguard FTSE Developed Europe UCITS ETF (Ire.), Vanguard FTSE Canada Index ETF (Can), Vanguard US Value Factor ETF (US).
Options for the diversified investor
Equities are still considered to be the traditional asset class with the highest return potential, despite a well-known price risk. The challenge today is to construct an equity portfolio in which the various components make the necessary diversification contributions to a robust long-term portfolio (stabilized by state pension and pension fund contributions in lieu of bonds). It is recommended to avoid other approaches such as more expensive thematic ETFs or a factorial approach (such as favoring value with higher dividend and lower priced stocks such as Vanguard FTSE All-World High Div Yield UCITS ETF : they may suffer from rising rates due to their often higher external financing needs). Consequently focus on market analysis based on currency and P/E to select diversified ETFs and build your portfolio over time.
Sources: www.dbs.com.sg/corporate/research-and-insight/insights www.dws.de/informieren/anlagethemen www.interactivebrokers.com/en/trading/globalanalyst
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