Exploring Mutual Funds – Examining the Content of a Portfolio

Ray Calleja

An article written by Ray Calleja: Head – Private Clients, MeDirect


In the preceding two articles we discussed how to measure the risks and returns involved with any mutual fund. A number of ratios have been developed that make it possible to accurately quantify the relationship between risk and return. These include a mutual fund’s volatility (standard deviation), how closely it mirrors a particular market index (R2), its volatility compared with that market index (Beta); how much the funds risk-adjusted return is attributable to its manager (Alpha) and compared the return of a mutual fund with the volatility (the Sharpe ratio). We also discussed the Morningstar ratings of a fund, which provide an assessment for its past performance and also its future outlook through the Analyst rating.

But before buying a fund, an investor must also find out what the fund owns and how it invests. Knowing what a fund owns helps you understand its past behaviour, set realistic expectations for what it might do in the future, and figure out how it will work with the other investments that you might own already. A fund can own equities, bonds, cash or a combination of the three, not to mention other securities. A fund’s name does not always reveal what a fund owns because funds often have generic names. 

Morningstar Style Box

The need to help investors choose funds based on what they really own instead of depending on the name of the fund or how they classify themselves or how they have performed recently was what made Morningstar develop its investment style box in 1992. The Equity Style Box is a nine-square grid (please see figure below) that classifies securities by size along the vertical axis and by value and growth characteristics along the horizontal axis. Different investment styles often have different levels of risk and lead to differences in returns. Therefore, it is crucial that investors understand style and have a tool to measure their style exposure.

Using the Equity Style Box

In general, a growth-oriented portfolio will hold the equities of companies that the portfolio manager believes will increase factors such as sales and earnings faster than the rest of the market. A value-oriented portfolio contains mostly stocks the manager thinks are currently undervalued in price and will eventually see their worth recognized by the market. A blend portfolio might be a mix of growth stocks and value stocks, or it may contain stocks that exhibit both characteristics.

The Morningstar Style Box helps investors construct diversified, style-controlled portfolios based on the style characteristics of all the stocks and funds included in that portfolio. They are updated every month and are recalculated whenever Morningstar receives updated holdings for the portfolio.

The Style Box also forms the basis for the style-based Morningstar Categories and market indexes.

The Equity Style Box captures three of the major considerations in equity investing: size, equity valuation and equity growth. Value and growth are measured separately because they are distinct concepts. A stock’s value orientation reflects the price that investors are willing to pay for some combination of the stock’s anticipated per-share earnings, book value, revenues, cash flow, and dividends. A stock’s growth orientation is independent of its price and reflects the growth rates of fundamental variables such as earnings, book value, revenues, and cash flow. When neither value nor growth is dominant, stocks are classified as “core” and portfolios are classified as “blend.”

Morningstar uses a flexible system that isn’t adversely affected by overall movements in the market. World equity markets are first divided into seven style zones:

  • United States
  • Latin America
  • Canada
  • Europe
  • Japan
  • Asia Excluding Japan
  • Australia and New Zealand

The equities in each style zone are further subdivided into size groups. Giant-cap stocks are defined as those that account for the top 40% of the capitalization of each style zone; large-cap stocks represent the next 30%; mid-cap stocks represent the next 20%; small-cap stocks represent the next 7% and micro-cap stocks represent the smallest 3%.

For value-growth scoring, giant-cap stocks are included with the large-cap group for that style zone, and micro-caps are scored against the small-cap group for that style zone.

Horizontal Axis

The scores for a stock’s value and growth characteristics determine its horizontal placement. There are five value factors and five growth factors, as per table below:

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The five value and five growth characteristics for each individual equity are compared to those of other equities within the same scoring group (e.g. Europe large-caps for style zone and size). Equities are then assigned Overall Value and Overall Growth scores based on the ten factors. If either growth or value is dominant, the equity is classified accordingly. If the scores for value and growth are similar in strength, the equity is classified as “core.” On average, the three equity styles each account for approximately one-third of the total capitalization in each scoring group.

An equity fund or portfolio is an aggregation of individual equities and its style is determined by the style assignments of the equities it owns. Style Box assignments for portfolios are based on the asset-weighted average of the style and size scores of the underlying stocks or equities. Few or no portfolios contain only stocks with extreme value-growth orientations, and both value and growth managers often hold core stocks for diversification or other reasons. Therefore, for portfolios, the central column of the Style Box represents the “blend” style (a mixture of growth and value equities or mostly core equities).

The Fixed Income Style Box

The Fixed Income Style Box is a similar nine-square grid and is listed for fixed-income funds. The data focuses on the two pillars of fixed-income performance: interest-rate sensitivity and credit quality. Morningstar splits fixed-income funds into three duration groups: Limited (Ltd), less than 3.5 years; Moderate (Mod) from 3.5 to 6 years; and Extensive (Ext), more than 6 years; and three credit-quality groups: High- (H), Medium- (M), and Low-quality (L).

These groupings display a portfolio’s effective duration and credit quality to provide an overall representation of the fund’s risk, given the length and quality of bonds in its portfolio. As with equity funds, nine possible combinations exist, ranging from short duration/high quality for the safest funds to long duration/low quality for the riskiest.

The style box for fixed-income funds offers a different interpretation on the way a fund house or company chooses to position a fund, such as by its name or marketing material. Style data relies upon the fund’s actual holdings, and therefore often proves to be a more accurate assessment of a fund’s investment approach.

The horizontal axis focuses on interest-rate sensitivity, as measured by the bond’s portfolio duration. (If duration is not available, the horizontal axis is based on the portfolio’s average effective maturity of the bonds in the fund.) Taxable Bond funds with durations of 3.5 years or less are limited; more than 3.5 years and less than six years, moderate; and more than six years, extensive. (Funds with an average effective maturity of four years or less qualify as limited; more than four years and up to 10 years, moderate; and more than 10 years, extensive.) Funds made up of municipal bonds (mainly used in the US and are issued by a local government) have a different classification.

It is important to note that fixed-income style data is useful for evaluating only the bond portions of a fund’s portfolio. Thus, funds with a significant mix of stocks, bonds, and cash may have a substantial portion of their portfolios left out of the fixed-income style data. Consequently, they will be given both equity and fixed-income style data. Fixed income style boxes are also updated on a monthly basis.

Credit Rating

Those bonds, which have an average credit rating of AAA and AA are categorized as high quality (H). Bond portfolios with average ratings less than AA but greater than or equal to BBB are medium quality (M) and those rated below BBB are categorized as low quality (L). For the purposes of Morningstar’s calculations, U.S. government securities are considered AAA bonds, non-rated municipal bonds are classified as BB, and all other non-rated bonds are labelled B.

While Equity funds usually run the range of possible style combinations, with funds from each objective varying greatly, Fixed-income funds, on the other hand, favour certain combinations over others. For example, there are far more extensive and moderate-maturity funds than limited-maturity funds, and far more funds boast high or medium credit quality than low quality.

It follows that bond funds with limited interest-rate sensitivity and high credit quality are less risky than those which venture into longer-duration and/or lower-quality bonds.

 

Morningstar Style Boxes for Equities and Fixed Income:
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In conclusion, the Morningstar style box immediately helps to give you an insight into the fund manager’s investment strategy. A growth portfolio will mostly contain higher-priced companies that the manager believes have the potential to increase earnings faster than the rest of the market. A value orientation, on the other hand, means the manager buys equities that are cheap, but that could eventually see their worth recognized by the market. A blend fund will mix the two investment styles together. We have discussed risk at length but the style box can also give you an idea on what sort of risks the fund exposes itself to. A fund that owns smaller, more expensive stocks is bound to be more volatile than one holding large, well-known and established names. And the style box allows you to quickly see where a fund’s portfolio lands.

Sector Weightings Report

The style box is a good tool for getting a snapshot of a fund’s investment style but there are other portfolio statistics which reveal additional insights and more information about a fund’s risk and return potential. One such report is the Sector Weightings.  

In 2011, Morningstar introduced a new sector structure which makes it more logical and easier to understand the decisions being made by the fund managers. It divides the stock universe into three “super” sectors – cyclical, sensitive, and defensive. Within these super sectors, they sub-divide the defensive sector into three groups and four groups each for the cyclical and sensitive sectors for a total of 11 sectors. Industry groups and specific industries within each sector permit further analysis, resulting in a unified system that applies to stocks, funds, and portfolios. Investors can quickly evaluate the similarities and differences of funds and portfolios by comparing exposure to the three Super Sectors, but they can also further examine holdings at a very granular level. Building on this structure, in 2019, Morningstar revised the industry group and industry level in response to market and technology changes. The revised system calibrates the classifications to align more closely with industry standards, clarifies industry definitions, and better reflects industry trends to allow for a more accurate grouping of companies based on market behaviour.

The Cyclical Super Sector includes industries significantly affected by economic shifts. When the economy is prosperous, these industries tend to expand, and when the economy is in a downturn they tend to shrink. In general, the stocks in these industries have betas of greater than 1.

The Defensive Super Sector includes industries that are relatively immune to economic cycles. These industries provide services that consumers require in both good and bad times, such as healthcare and utilities. In general, the stocks in these industries have betas of less than 1.

The Sensitive Super Sector includes industries that ebb and flow with the overall economy, but not severely. Sensitive industries fall between defensive and cyclical, as they are not immune to a poor economy, but they also may not be as severely affected as industries in the cyclical Super Sector. In general, the stocks in these industries have betas that are close to 1.

Platform Structure

The platform structure is a single, unified scheme, with the Morningstar equities universe forming its base. These equities are mapped into their appropriate industries, and the industries themselves are mapped into industry groups. These industry groups are then rolled into sectors. Finally, the sectors are consolidated into Super Sectors, as explained above.

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Each equity is mapped into one of 145 industries, the one that most accurately reflects the company’s underlying business. This mapping is based on publicly available information about each company found in the annual reports, and Morningstar Equity Analyst input as its primary source. Secondary sources of information may include company websites, research, and trade publications.

Industries are subsequently mapped into 55 industry groups based on their common operational characteristics. If a particular industry has unique operating characteristics or lacks shared characteristics with other industries, it would map into its own group. However, any industry group containing just a single industry does not necessarily imply that that industry is dominant or otherwise important. It simply reflects the lack of a sufficient number of shared traits among the other industries.

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Morningstar calculates a fund’s sector exposure based on the amount of assets it has in stocks in each sector. By knowing how heavily a fund invests in a given sector, you will know how vulnerable it is to a downturn in that part of the market or how much sector risk it is taking on.

By and large, equities are mapped into the industries that best reflect each company’s largest source of revenue and income. If the company has more than three sources of revenue and income and there is no clear dominant revenue or income stream, the company is assigned to the conglomerates industry. Descriptions, assets, and competitors are all considered when revenue does not paint a clear picture. Morningstar may change industry assignments to more accurately reflect the changing businesses of companies and all the companies are reviewed at least once annually and whenever there are major corporate actions for them.

Number of Holdings and Trading Behaviour

Knowing the number of equities, a fund owns can be just as important as any of the other factors we have discussed. Whether your fund holds 20 equities or a hundred will make a big difference in its behaviour. If you have a fund with only a handful of equities, it is likely to see a lot more turnings (up or down) in its performance than a fund which holds plenty of equities. The latter is likely to have little impact on the fund’s total return if, for example, one of its equities has taken a turn for the worse.

The number of holdings in bond funds tends to have less of an impact on how they behave. Nevertheless, a bond fund with more holdings is likely to be less volatile than one that is more concentrated in bonds from a smaller number of issuers. A bond fund is considered to be particularly risky if it invests in lower-quality bonds and also concentrates in a short list of holdings.

Information on the total number of holdings along with details of the top holdings of a fund, as well as the Style-Box and Sector Weightings are all available for any mutual fund in the Morningstar factsheet, which can be downloaded from the MeDirect website.

Turnover rate is another important aspect to consider when examining a fund’s style. It measures how much the portfolio has changed during the past year and shows approximately how long a fund manager typically holds a stock. To get the turnover of a fund all you have to do is divide the fund’s total investment sales or purchases (whichever is less) by its average monthly assets for the year. The turnover rate, which must be included in the fund’s annual report, can tell you whether a manager tends to buy and hold equities for the long term or frequently trading in and out of such equities. Typically, equity funds have a 100% turnover rate. Managers who keep a low turnover often practice low-risk strategies, whereas high-turnover funds indicate an aggressive and riskier approach. Growth-oriented fund managers often employ high-turnover strategies while the more value-conscious ones tend to be more patient with the holdings in the fund.

High-turnover funds tend to incur higher expenses in terms of capital gains tax during the selling of equities. Also, if the fund is relatively large any disposal of equities is bound to be significant in the market where it trades and so offering a large number of shares is likely to adversely affect the price of the equity and may have to accept a lower price. This would ultimately impact the fund’s shareholders. Most people will look for equity funds with a turnover rate of lower than 50%.

Many bond funds employ short-term trading strategies that step up their turnover rates but do not meaningfully affect their risk levels, tax efficiency or trading costs.

It is always a useful exercise to know what you are holding in your mutual funds and how they combine to give a bigger picture. If you keep track of your portfolio and have a preference for some sectors over others, the Morningstar Style-Box and Sector Weightings are simple but useful tools to help you determine your overall asset allocation.


The above is for informative purposes only and should not be construed as an offer to sell or solicitation of an offer to subscribe for or purchase any investment. The information provided is subject to change without notice and does not constitute investment advice. MeDirect Bank (Malta) plc has based this document on information obtained from sources it believes to be reliable but which have not been independently verified and therefore does not provide any guarantees, representations or warranties.

MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority under the Banking Act (Cap. 371) and the Investment Services Act (Cap. 370).

The financial instruments discussed may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in any of the products discussed you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.


The Digest

Global equities recovered to trade higher last week, shaking off headlines on coronavirus second-wave fears, trade spats, poor economic data and US political uncertainty to focus on fiscal and monetary stimulus. The MSCI Global Index was up 2.1% on the week, the S&P 500 Index was up 1.9%, the Stoxx Europe Index 600 was up  3.2%, whilst the MSCI Asia Pacific Index was up 1.4%. In the United States, President Donald Trump’s team is weighing a US$1 trillion infrastructure spend, whilst in Europe, the European Central Bank (ECB) published the results of the fourth round of its targeted longer-term refinancing operations (TLTRO) and on Friday, European leaders opened negotiations over their proposed recovery fund.

New Stimulus Buoys Markets

Global stimulus has been a hot topic as we progress through the COVID-19 crisis. By the end of last week there had been US$18.4 trillion of stimulus injected into the global economy in 2020—that is, US$10.4 trillion of fiscal stimulus and US$7.9 trillion in monetary stimulus. We have also had 134 central bank rate cuts this year. Last week saw a continuation of this theme, with a number of monetary policy announcements globally.

United States/Federal Reserve (Fed)

The focus was on President Donald Trump’s $1 trillion infrastructure proposal, which he hoped would add some impetus to the US economy at the time of a significant economic downturn. The details of the proposals were never clarified; however, it was noted that the Department of Transportation would take a sizeable proportion to upgrade roads and bridges. Last Thursday, the House Democrats also came with a proposal for investment into US infrastructure totalling US$1.5 trillion. This would include the US$500 billion highway bill which is due to expire in September. We also heard from the Fed towards the start of last week when the US central bank announced it will begin buying individual corporate bonds under the Secondary Market Corporate Credit Facility (SMCCF) starting June 16.

Bank of England

We heard from the Bank of England (BoE) on Thursday when the UK central bank kept interest rates on hold at 0.1%, in-line with market expectations. Negative rates were not mentioned. The central bank also announced an increase in quantitative easing (QE) of £100 billion, which was at the lower end of expectations. Interestingly, BoE Chief Economist Andy Haldane dissented on the vote of additional quantitative easing, preferring no change. In another hawkish slant, the increased QE is expected to last until the end of 2020, reducing expectations of further increases in the next few months. Also, the BoE announced its asset purchasing programme is due to reach £745 billion by the turn of the year, and this will be under continuous review.

It is worth noting the BoE comments around the dip in UK gross domestic product (GDP), which the BoE stated would be “less severe than set out in the May report”. The UK economy is expected to be one of the hardest-hit around the world this year, with the BoE’s analysis in May pointing to a potential 14% drop in GDP without a second wave of COVID-19. In comparison, the Organisation for Economic Cooperation and Development (OECD) had anticipated this dip to be 11.5% for the United Kingdom in 2020. So, with the June report, the BoE is of the opinion that the impact won’t be as bad as it initially feared.

Europe/ECB

The ECB announced the results of the fourth round of its TLTRO-III operations. Expectations were for allocations in excess of €1 trillion; the ECB’s Isabel Schnabel had stated the uptake could be in the region of €1.4 trillion. This liquidity mechanism is designed to ensure the European financial system does not experience a credit crisis like we saw in 2008It is important to understand that there are incentives for the banks to increase their lending using this funding.

European leaders met last Friday for the latest round of discussions on the €750 billion European Union (EU) Recovery Fund. The Fund has the backing of German Chancellor Angela Merkel, French President Emmanuel Macron and ECB President Christine Lagarde.  Lagarde applied pressure, saying that there is market risk without a deal, and that the recent calm in financial markets is in part because investors have priced in action from governments.

Despite Merkel commenting that talks were “constructive”, there was no formal agreement on Friday; certain countries were not content with some of the key details. Austria, Denmark, Sweden and the Netherlands expressed they are not happy with the size of the fund and believe that any support should be repaid rather than given as grants. Whilst some key details need to be agreed upon and time is limited, consensus opinion is that there will be an agreement. The next round of negotiations is reported to be scheduled for mid-July.

Coronavirus Second-Wave Risks

The risk of a potential second wave of COVID-19 infections continues to dominate headlines. Some key US states continue to see an uptick in infection rates, with Florida, Texas, California and Arizona thought to be among the worst affected, all reporting new record high single-day increases on Thursday. The total number of cases in the United States has increased overall but is still way off the peak from mid-April.

In China, Beijing had shut schools again after an increase in cases in the city. In Europe, over the weekend the headlines focused on Germany, where the “R-rate” did show a sharp increase, but this appeared to be caused by isolated breakouts and the increase in the rate of infection comes from a relatively low base. Italy, France and Spain reported no increase in infection rates over the week.

UK Economic Impact

In terms of economic impact in Europe, the focus remains on the United Kingdom, which has been terribly impacted by the outbreak and has reported the highest number of COVID-19 related deaths within the region. The economic impact on  the United Kingdom is predicted to be one of, if not the worst, globally in 2020.

As noted, the BoE had anticipated in May that UK GDP could be hit as much as 14% in 2020 (albeit, they have now revised this figure lower),  worse than France (-11.4%), Italy (-11.3%), the eurozone (-9.1%), the United States (-7.3%) and Germany (-6.6%). UK GDP is now back at 2002 levels, wiping out 18 years of economic growth in two months.

The economy is expected to rebound; however, the UK still has the highest number of active cases in Europe, which leaves British consumers constrained when compared to their peers in Europe. GDP and Purchasing Managers’ Index (PMI) data have shown signs of improving, but current mobility levels in the United Kingdom are still way off pre-lockdown levels.

Meanwhile, the UK job market has experienced its worst contraction on record, with UK payrolls dropping by 600,000 between March and May this year.

This dour data has led many to question the condition of UK domestic stocks post-COVID-19, with the recovery path for the UK economy appearing more protracted than its European peers.

Yet, UK equities continue to trade roughly in line with European  peers despite the ongoing risks.

Last Week in Review

 

Europe

After the prior week’s sell off, European equities managed to recover the majority of their losses. The ECB published the results of the fourth round of its TLTRO operations (which was taken well) and on Friday, European leaders opened negotiations over their proposed recovery fund. Germany and France are pushing for the deal to be wrapped up next month, which we think should be positive for market sentiment, despite pushback from some more fiscally conservative countries (e.g., Austria).

According to the Bank of America Merrill Lynch (BAML) Fund Managers Survey, six out of 10 investors see the recovery fund as positive for European risk assets, and the eurozone is the most favoured region to overweight over the next 12 months (net 14%, highest since May ’18). Whilst this is positive on its own, the foreign exchange market is generally thought of as being more indicative of bullish sentiment, and 31% of survey participants see the euro as the most likely currency to appreciate in next 12 months. This is the highest reading since 2003.

The United Kingdom remains the least favoured region, with a net 29% of participants underweight the UK and 41% of investors saying they would underweight UK stocks (more on the UK below).

With all of this, the STOXX Europe Index 600 closed last week up 3.2%, leaving the index  down 12.6% year to date. Last Thursday’s BoE meeting was also in focus, with the slightly more hawkish slant seeing the sterling finish lower against the US dollar on the week, lending some support to the exporter-heavy FTSE 100 Index.

Brexit talks continue behind the scenes, with an incremental positive after a video conference between European Commission (EC) President Ursula Von Der Leyen and UK Prime Minister Boris Johnson ended with the latter apparently willing to compromise, leading to some hopes that a deal of sorts will be done. Both leaders agreed to inject fresh momentum in to talks and agree that a deal needs to be agreed by October to allow time for ratification before the transition ends on 31 December this year.

United States

US markets recovered their poise at the end of last week and regained some of the ground lost during the prior week. Whilst there are some nerves over the increasing number of COVID-19 cases in certain states, the market for now continues to shrug this off. Focus seems to be more concentrated on supportive actions from the Fed and chatter of further infrastructure spending from the Trump administration. It was a bit of a mixed bag in terms of sector performance, with health care and technology improving, whilst utilities and energy lagged behind.

Macro data continues to impress. The Citigroup Economic Surprises Index rebounded from a record low to a record high, whilst retail sales in May came in +17.7% month-on-month, better than expected. The Philadelphia Fed’s Manufacturing Business Outlook survey also beat expectations.

Looking ahead, it is important to keep a close eye on the news flow around the US presidential election coming up in November. Equity markets have been optimistic around this issue so far, but from an equity market perspective, a prolonged surge in support for Democratic candidate Joe Biden could weigh on sentiment. Biden has talked about reversing some of the “market-friendly” tax reforms the Trump administration put in place.

Asia Pacific (APAC)  

Asian markets also edged higher last week, with the MSCI Asia Pacific Index finishing higher on the week. Stocks on the Shanghai exchange in China also outperformed on the week, while South Korean equities lagged. Despite a fresh COVID-19 outbreak in Beijing, as in other global markets, investors largely shrugged off concerns over a second wave.

There was a lot of geopolitical noise in Asia that markets also appeared to take in their stride for now. In one incident, a border confrontation between Chinese and Indian forces resulted in a number of casualties. Elsewhere, North Korea blew up a border facility to signal their displeasure at recent South Korean actions.

Focus was also on the Bank of Japan meeting last Tuesday which saw policymakers reiterate their accommodative stance, helping Japan’s Nikkei Index to finish higher at the end of the week.

Finally, it is interesting to see an economy still predicting growth this year. Vietnam last week chose not to adjust the nation’s 2020 economic growth target of 6.8%. The country’s leaders have also been praised for their swift reaction to the COVID-19 crisis. Vietnam is also a beneficiary of businesses seeking to readjust their supply chain from China to other countries.

The Week Ahead

Looking at macro data this week, Tuesday’s global PMI data will be the key release and it’s all pretty quiet on the corporate earnings front. The PMI release is expected to show an increased pick up as lockdown measures continue to be eased across the region; of course, with this comes risk of disappointment, which could be market-moving. US jobless claims and GDP will also be in focus.

In Europe, EC President Von der Leyen will present the bloc’s draft general budget for next year and report on the EU’s performance in 2019. We also get an update from Brexit negotiator Michel Barnier on the current state of negotiations. The International Monetary Fund (IMF) will also publish its June World Economic Outlook Update on Wednesday.

 

Calendar:

Monday 22 June:

  • Macro: Eurozone Consumer Confidence, US Existing Home Sales
  • Political: EU-China Summit begins, United States and Russia meet for a new round of arms-control talksort.

Tuesday 23June:

  • Macro: French, German, Eurozone, UK Manufacturing, Services and Composite PMI, US New Home Sales

Wednesday 24 June:

  • Macro: Dutch GDP, French Business Confidence, Swedish Consumer Confidence, IMF publishes June World Economic Outlook Update
  • Monetary Policy: Reserve Bank of New Zealand interest-rate decision

Thursday 25 July:

  • Macro: Spanish PPI, US Jobless Claims, US GDP
  • Monetary Policy: BOE’s Haldane speaks, ECB General Council Meeting and minutes from 3-4 June meeting
  • Holidays: China’s markets closed

Friday 26 June:

  • Macro: French and Italian Consumer Confidence, US Personal Income and Spending
  • Holidays: China’s market closed


Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 22 June 2020, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

BlackRock Commentary: Warming up to Europe

Mike Pyle, Global Chief Investment Strategist at the BlackRock Investment Institute, together with Elsa Bartsch, Head of Macro Research, and Scott Thiel, Chief Fixed Income Strategist also both part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.


Europe’s policy response to the virus shock was slow to get going – but an impressive array of fiscal and monetary measures is getting into place to bridge the economy through the shock. The euro area has also had relative success in tamping virus growth, positioning it well for reopening its economy. We see the two factors as supporting the region’s economy and markets in coming months.

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Sources: BlackRock Investment Institute, with data from Google, June 2020. Notes: The chart shows the percentage change in mobility (seven-day moving average) relative to the median level between Jan. 3 and Feb. 6, 2020. The yellow line is a simple average of Germany, France and Italy. The lines start on Feb. 24.

Lockdowns in Europe started relatively early and caused mobility to plummet. Google data – which use mobile phone location data to measure the change in visits to stores and workplaces as well as use of public transit – show average mobility levels across Germany, France and Italy plunging more than 70% below pre-virus levels. See the yellow line in the chart. The sharp drop was a huge drag for activity in the short term, but helped curb the virus spread more effectively. Mobility has rebounded quickly and is now on par with the level in the U.S. This bodes well for a pickup in activity, especially as it comes with a lower risk of infection resurgence, in our view. As a result, we could see the pace of recovery in the second half outpacing other regions, including the U.S.

After an initially slow start, the euro area’s policy response to the virus shock is picking up pace, with additional spending measures announced recently by Germany and France. Combined with additional monetary support, the size of stimulus is broadly sufficient to match the income shortfall on a euro area level, our analysis shows. The European Central Bank (ECB) has launched new and more flexible quantitative easing: the pandemic emergency purchase program (PEPP). Its targeted longer-term refinancing operations (TLTRO) scheme holds the promise to provide support to the private sector via cheap loans to banks. The ECB has also made clear that it stands ready to do more in monetary policy stimulus if the inflation outlook is still not showing sufficient progress toward price stability in September.

In addition, we see the new 750-billion-euro European recovery plan as a crucial turning point for Europe’s economy and financial markets. The bulk of the proceeds will be distributed as grants – over and above offering cheap financing to ensure the flow of credit to virus-hit economies through new European Stability Mechanism (ESM) credit lines.  It will also for the first time create a jointly issued European “safe” asset of a meaningful size. Such pan-European debt would start to rival the total volume of German federal government debt outstanding, after including the almost 300 billion euros of ESM debt outstanding. To be sure, this is not a “Hamiltonian moment” for Europe – harkening back to the U.S. federal government assuming the debts that states incurred in the War of Independence. It’s about newly issued debt, and more work is needed to move the euro area toward a fully-fledged fiscal union.

Policy implementation risks remain. And the risk of a no-deal Brexit looms. Yet the BlackRock geopolitical risk indicator already shows elevated market attention to the European fragmentation risk, suggesting markets may have priced in at least part of that risk.

Bottom line: We are seeing many reasons to be optimistic about the euro area in the second half of 2020, including the ramped-up policy response and effective public health measures. The sum total of the euro area’s policy actions looks impressive – and they come on top of relatively large automatic stabilizers such as generous welfare benefits. As a result we maintain our overweight in European peripheral government bonds and are considering an upgrade to European equities.

Market Updates

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Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, June 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

 

Market backdrop

Measures to contain the virus are gradually being eased in many developed economies. May’s data suggested the worst of the contraction may be behind us, but we see a bumpy restart in coming months. We are tracking the interplay of containment measures and mobility changes on activity as economies have started to reopen. The unprecedented policy response has boosted markets, leaving a potential resurgence of infections and policy implementation as key risks. U.S. Congress is headed for a fiscal cliff as jobless benefits, state support and payroll protection measures are expiring soon.

Week Ahead

  • Monday:  Euro area consumer confidence flash
  • Tuesday: U.S., UK and euro area flash PMIs
  • Wednesday: German IFO business survey

A spate of business and consumer sentiment data across the U.S. and Europe could help markets assess signs of a rebound in activity. The pace of the activity restart depends on how successful countries are in suppressing the virus. We see a greater danger of renewed outbreaks in the U.S., UK and Canada than in Germany and Japan, based on our research on the relationship between mobility and virus infection rates.


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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 22nd, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

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