Market Musings 180922: Which sectors and themes are resisting the best?

Market Musings 180922:
Which sectors and themes are resisting the best?

Hunting for sectors, regions, and themes that could be the next market leaders.

Summary:

1. Energy, focusing on solar energy and battery metals such as lithium, are emerging as a clear market leader
2. The value + dividend investment styles are clearly beating growth
3. In the US, mid-cap stocks are beating large-caps
4. In Europe, Eurozone banks are starting to resist well and offer tempting yields
5. Global listed infrastructure ETFs continue to perform well, with their exposure to infrastructure assets in Energy, Utilities, and Transportation sectors and their bias to North America (and US dollar assets).

Video + Article for this week:
September update of our 2022 Investment Themes

• Theme 1: Responding to today’s energy crisis
• Theme 2: Securing the bare necessities of life
• Theme 3: hunting for quality income

Hunting for resistant segments in a falling stock market

This week did not spare the stock market bulls, with global stock markets hurt by continued worries over painfully elevated US inflation rates.

The US S&P 500 benchmark index ended the week at -17% for 2022 to date, while the MSCI World index (in GBP) eased back to -6% and the UK FTSE 100 -4% for the year to date. Bond and corporate credit markets fared equally poorly, with cash the place to be in the very short term.

Despite this setback, there are still segments of the global stock market that look interesting.

In looking for the potential next market leading segments to focus on once financial markets turn up, one should focus on those segments of the stock market that are already holding up better. These tend then to be the sectors, themes or regions that then go on to outperform in an eventual market recovery.

What are some of these segments that we should focus on at present?

1. Energy sectors - Solar energy, Lithium producers, Uranium

Energy is an obvious place to start, given the current energy crisis and the strong performance to date of the global Oil & Gas sector. Aside from OIl & Gas, I have noticed that solar energy stocks have started to perform well even in the current difficult market context.

Since mid-May, the TAN Invesco Solar ETF has soared 48% while the S&P 500 has lost 1%. This makes sense, given the expected acceleration of both European and global investment in renewable energy generation to diversify away from reliance on Russian natural gas.

Within the battery metals space, the LIT Global X lithium and battery tech ETF has gained 13% since mid-May, led by lithium producers as electric vehicle demand picks up on the back of expensive petrol and diesel prices.

Thirdly, the URNM Sprott Uranium Miners ETF has risen 20% since mid-May (despite a sharp pullback in the last few days), as the number of nuclear reactor restarts and new projects globally continues to grow. Reliable base load electricity generation via nuclear power has become a key focus for European, Japanese, Chinese and US governments.

Since mid-May, TAN, LIT and URNM have all performed well

Source: tradingview.com

2.Value and high dividend stocks/sectors

Last week, I noted the strong relative performance of the global value and high dividend investment styles over the benchmark MSCI World index. This continues to be the case, with the IJJ US mid-cap 400 value ETF showing strongest Stateside since the start of this year (-11% versus -18% for the S&P 500).

The SPHD Invesco S&P 500 High Dividend Low Volatility ETF has fallen only 2% over 2022 so far, beating the S&P 500 (-18%) by 16%. In reality, the gap in performance is even greater, as this does not count the dividends paid this year.

Over 2022 to date, SPHD High Dividend Low Volatility ETF has held up well

Source: tradingview.com

Equally, in Europe the CD9 Amundi MSCI Europe High Dividend Factor ETF has fallen only 3% over 2022 to date, beating the benchmark STOXX Europe (-16%) by 13%.

After such a prolonged period of outperformance by global growth stocks over the last 10+ years, led by the Technology/Internet sector, we can perhaps look to a period of value outperformance for a prolonged period, given the changed economic backdrop of higher interest rates and inflation.

3.Eurozone banks, helped by the ECB

One industry sector that forms a large part of the value and dividend market segments at present is the Banks sector. In the eurozone, retail banks are being given a huge helping hand by the European Central Bank (ECB), as interest rates start to rise.

Eurozone Banks start to revive on interest rate increases

Source: tradingview.com

The key deposit rate in the eurozone has been negative for a number of years until very recently, representing an effective tax on deposits held by eurozone retail banks. This has now been removed as the ECB have raised the deposit rate to +0.75%, and look set to raise interest rates further in the months ahead. This increase in short-term interest rates will be a positive driver for eurozone bank profitability in 2023.

There are obvious negatives for the banks sector too of course, most notably the risk of increasing bad loans as Europe slips into economic recession and company bankruptcies rise. Higher mortgage rates are also a drag on residential mortgage volumes for banks, pointing to lower future profitability from this source.

4.Global infrastructure ETFs

In a time of high inflation, “real” or “hard” assets with some element of inflation protection built into their income streams are very attractive. While the Real Estate asset class would be the obvious choice here, it has been hit by a combination of economic recession worries (hurting potential demand for offices, warehouses etc.) and higher long-term interest rates (making financing of real estate projects more expensive).

In contrast, global infrastructure funds also own real/hard assets in the form of energy pipelines, storage and transmission networks, water pipeline networks, motorway toll, rail and airport assets, and digital/internet assets in datacentres, mobile phone towers and critical internet backbone networks.

This type of long-term, real asset exposure with natural inflation hedging is a very attractive investment proposition to pension funds and insurance companies. The main problem is that they cannot find enough good infrastructure assets to buy.

Listed infrastructure remains the best-performing asset class over the year to date, with the TOLZ Proshares Dow Jones Brookfield Global Infrastructure ETF (in US dollars) at -3% this year so far, and the INFR iShares Global Infrastructure ETF (in GBP) +13%.

Global infrastructure far outstrips global equities in 2022

Source: tradingview.com

Investment conclusion: Energy, Value/Dividends, Infrastructure

• Energy remains a hot area - RAYS Solar Energy UCITS ETF, Renewable Infrastructure funds (TRIG, GRID, FSFL), LITG Lithium UCITS ETF, URNG Uranium UCITS ETF;
• Global Value and Dividend Stocks - IWFV MSCI World Value UCITS ETF, VHYL FTSE All-World High Dividend Yield UCITS ETF;
• European Banks - CB5 Amundi ETF MSCI Europe Banks UCITS ETF;
• Global Listed Infrastructure - INFR iShares Global Infrastructure UCITS ETF

Have a great week

Edmund