US traders prefer companies that are more stable


Investors have been slow to embrace the stock rally
Chief Investment Office14 Mar 2019
Photo credit: AFP Photo


US

Despite a rally that has added USD2.5t to the value of US stocks, traders are showing a growing preference for companies that are more insulated from an economic downturn.

Firms with strong balance sheets are rising at the fastest pace relative to their weaker counterparts in six years, according to indices run by Goldman Sachs Group Inc. Exchange-traded funds (ETF) that focus on more stable companies have taken in more than USD2b since 31 December, data compiled by Bloomberg Intelligence show. If that holds or grows, it will be a record year for the funds.

It is a testament to the prudence that remains after the fourth-quarter meltdown, even as equity markets rebound higher. From mums and pops to hedge funds and institutions, investors have been slow to embrace the stock rally. So far, 2019 has seen the worst start to a year since 2008 for equity flows, according to a major financial firm. Yet quality stocks have emerged as a clear favourite.

The iShares Edge MSCI USA Quality Factor ETF, the largest ETF that tracks these companies, saw its second-largest inflow of the year on Tuesday (12 March), adding USD175m, data compiled by Bloomberg show.

US equities gained as data signalled a resilient economy and modest pressure on inflation. The S&P 500 Index climbed for a third day, by 0.69% to 2,810.92, wiping out last week’s (ended 8 March) losses and reaching a four-month high as it held above the key 2,800 level. – Bloomberg News.

 

EUROPE

Volkswagen AG cancelled plans to sell a share of its Traton SE division due to weak market conditions, dealing a setback to the automaker’s plan to generate fresh funds for the heavy-truck unit’s expansion outside Europe.

“We regret that we have to refrain from a stock listing of Traton SE,” Chief Financial Officer Frank Witter said Wednesday. “The management board continues to aim for a stock listing in a better market environment.”

Volkswagen decided to delay after a difficult start to the new year for the global automotive industry. In Europe, Traton’s biggest market, the economy is forecast to grow this year at the slowest rate since 2013. Activity has declined in part due to uncertainty surrounding the UK’s departure from the European Union and US President Donald Trump’s threats to increase tariffs on European-made cars.

Carmakers including Volkswagen are also suffering in China, the world’s biggest auto market, and the top region for the company’s sales. A slowdown there has worsened in the first two months of the year, and Volkswagen this week (ending 15 March) said that its growth forecast for the year would depend on improvements in the second half. – Bloomberg News.

Volkswagen was up 1.08%, after earlier gains of as much as 1.8%.

The Stoxx Europe 600 Index rose 0.63% to 375.60.

 

JAPAN

The Bank of Japan (BOJ) may be paring purchases of exchange-traded funds (ETF) to take advantage of the stock market’s stability. On each of the four days that it conducted operations this month, the BOJ bought JPY70.2b (USD631m) of regular ETFs tracking Japanese shares. That was the lowest daily amount since the central bank doubled its annual buying target in July 2016.

Analysts point out that the reduction does not signal the central bank is tapering its ETF buying programme, as the BOJ has said that it may increase or decrease purchases depending on market conditions. In fact, an increasing number of economists see additional stimulus as the next policy step, while they are unanimous in forecasting no change at this week’s (ending 15 March) board meeting.

Still, the cut in ETF purchases may signal the BOJ’s desire to taper buying when market conditions allow, according a strategist in Tokyo. Most of the economists in a Bloomberg survey still expect the BOJ to eventually tighten policy, though they have been pushing back the timing for this change.

The BOJ stepped up purchases in December when a global equity rout sent Japanese stocks into a bear market, buying a record JPY6.5t of ETFs in 2018. With the Topix Index up more than 6% this year, the BOJ has slowed buying in January and February.

On 6 March, BOJ board member Yutaka Harada said that if risks to Japan’s economy materialise or a hit to price growth proves to not be temporary, the BOJ would not hesitate to step in.

“Japan’s economic sentiment is worsening, and some BOJ board members are voicing that they won’t hesitate to take action,” Fujito said. “If the global equity markets become volatile again, the BOJ may have little choice but to increase its ETF target as its next policy step.” – Bloomberg News.

The Nikkei 225 Index rebounded 0.79% to 21,457.57 at the open on Thursday (14 March), after falling 0.99% to 21,290.24 on Wednesday.

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