Equities vs Bonds vs ETFs: Trends You Should Not Miss

  • Jun 09, 2020 AEST
  • Team Kalkine
Equities vs Bonds vs ETFs: Trends You Should Not Miss

Summary

  • Using an ETF to access short-term treasuries can help investors stay fully invested and diversify portfolio.
  • For years, investors have tended to trade ETFs more in times of uncertainty, which underscores their utility in times of market duress- a preferred crisis trading tool.
  • ASX seen to be trading above 6000 on 9 June, demonstrating a period of solid gains wherein banks, mining, real estate and industrial players stole the show whereas tech stocks and healthcare players fell.
  • While, possibility of second COVID wave, social unrest and increasing trade tensions continue to hover, emerging trends across different investment vehicles need to be carefully monitored.

Novel coronavirus worries injected sudden and severe volatility into global financial markets and provoked what seems to be the most juddering asset price swings witnessed since the Great Financial crisis of 2008. Such was the economic imbalance and market turmoil; experts feared a looming Global Virus Crisis (GVC) in the radar. Global equity benchmarks plummeted from record highs into the bear market territory in a matter of weeks, although to bounce back later on. What deepened the drama was the fall in the price of oil, fiercely stressing an already strained market.

But market did respond back with vigor against war with the invisible enemy.

In May 2020, global equities persisted to pushed higher, continuing the market rebound owing to ongoing hopes of a prompt return to economic normalcy with COVID-19 cases and social distancing restrictions further easing in most advanced economies. 

Amidst this, it should be noted that ETFs and bonds have established the fact that they are an integral part of today’s financial architecture.

ETF & Bond Trends

During periods of exaggerated market volatility, Australian investors have noticeably flocked to fixed income ETFs to fabricate buoyant portfolios, be it for capital preservation, income generation, or to diversify from regular equities.

Especially in the current backdrop of reduced equity dividends and ultra-low interest rates, ETFs seem to offer cost-effective, liquid investment choices to meet investors’ demand for diversified sources of income.

Bond yields, which move opposite to price, held steady and gold prices rose further. There was a modest decline in government bond yields relative to their average of recent years, which was supported by low inflation and accommodative monetary policy along with further narrowing in credit spreads.

Having said this, ETFs offer elevated intraday liquidity and instantaneous experience to the complete asset classes, industry sectors, and global markets. Consequently, experts opine that yields could continue to rally given that positive economic data is sustainable.

What Has COVID-19 Illustrated About ETFs & Bonds?

As per a report by BlackRock, in Canada, between February 24 and 13 March 2020, bond ETFs traded an average of CAD 0.7 billion per day, almost two times the average daily traded value between 2 January and 21 February 2020. Besides, ETFs accounted for 19 per cent of the trading activity relative to 13 per cent on average between 2 January and 21 February 21.

A factor that can be attributed for this trend is one of the steepest declines for risk assets that resulted in the heaviest ETF activity as investors sought to rebalance portfolios and hedge positions.

While, in the US when market volatility had abruptly accelerated over same period, ETFs accounted for 38 per cent of all US trading activity relative to a 27 per cent average for 2019.

Notably, during the week of 9 March, ETF trading volumes surged to a record USD 1.4 trillion and similar records were set in other markets across the globe.

What can be the Winning Approach?

Companies and investors have been eyeing bonds with global interest rates at lows offering them the opportunity to refinance existing debt while addressing their investing appetite amid the COVID-19 crisis. A boon that the market has remained open, and bonds have evolved as debt instruments of choice to even facilitate capital raisings for projects with a larger move to sustainable finance, seems well-fitting.

But what should one consider if one wishes to consider an ETF or bond in the crisis hour?

 

 

Over to ASX 200- Star Performers of Last Week

On 5 June 2020, ASX briefly hit 6000, a threshold last witnessed in the first weeks of March 2020. Last week cemented a period of solid gains for the Australian stock market with S&P/ASX 200 index surging up by 0.1 per cents/ 6 basis points, to close at 5998.69.

With the economy rebounding at the back of solid stimulus package, gradual easing of restrictions and lockdowns, businesses starting to revamp, business confidence seems to be finding back its place in the economy that has not witnessed a recession in over two decades.

However, possibility of a second COVID wave, social unrest and increasing trade tensions continue to hover.

Let us look at two stocks that performed well in the week-

Australia and New Zealand Banking Group Limited (ASX:ANZ)

The big four banks performed strongly on 5 June 2020, wherein ANZ was up by 2.9 per cent and quoted $ 19.77. On the operational front, the Group has agreed to sell UDC Finance, its asset finance business in NZ, for a total of NZ $762 million to Shinsei Bank Limited, justifying a strategy to make its business easier and simpler.

Moreover, the sale will release over NZ $2 billion of funding offered by ANZ (NZ), additionally bolstering its balance sheet strength.

Qantas Airways Limited (ASX:QAN)

Travel stocks were another top weekly performer gaining from the rising hopes of a rapid reopening of the Australian economy.

QAN advanced to $ 4.63 on 5 June 2020. The Company reportedly plans to significantly boost domestic capacity with the pandemic-related travel restrictions easing. More flights are expected in July, reliant on travel demand and additional reopening of state borders. It should be noted that July is a month of school holidays that can set the scenario for domestic travel up (if restrictions are eased).

Let us await the new week’s show- which has just begun! While, investors are cheering with ASX 200 trading above 6000 mark driven by NASDAQ hitting record close, indicating bull market phase.

(Note: All currencies in AUD except when otherwise specified)

 


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