Utilities index tracker vs total index tracker: Recession warning?

5th Sep '19 by William K

2 comments 749 reads

The popularity of index trackers is growing. Passively managed funds outperform actively managed funds about 75% of the time and they have much lower charges - some as low as 0.07% per annum. In times of uncertainty, institutional investors often shift their money to utilities which are perceived as safer than most other alternatives - after all people use the same amount of electricity and water during recessions as they do during boom times. For this reason it makes sense to switch from total index trackers such as VANGUARD S&P 500 UCITS ETF (LON:VUSA) to a utilities sector tracker such as ISHSV S P 500 UTILIT.SEC UCITS ETF (LON:IUSU). Over the last year VUSA has grown by 6% whilst IUSU has grown by 28%. Over the last month, IUSU has surged whilst VUSA has remained static. These figures can be used as an indication that US investors are bracing themselves for a substantial market correction if not a crash.

I hold ISHSV S P 500 UTILIT.SEC UCITS ETF (LON:IUSU).

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HumourMe

5th Sep '19

Euro utilities are behind the curve:

jwebster

The last IMS figure was 49.1 so US manufacturing is contracting. US consumer is still holding up with strong employment and thus spending, keeping the wheels spinning. Of note, US manufacturing weekly working hours is declining, so factories are pulling back on hours, but not layoffs, yet. German manufacturing doing poorly. Weakness in manufacturing spreading to Spain and Ireland.

The yield curve has inverted so the bond market is signalling the Fed will have to lower rates. Precious metals up on this talk. Classic recession signals.

However, Trump needs to win that election. He may have overplayed his hand a bit, given the poor numbers coming in. Sense a trade deal coming. Timing is tricky, it's a bit early, as election is not until November next year.

On the bull side, China has announced credit relaxation for lenders and bonds for local provinces to get spending. Their plan is to soften the trade war blow for now. Of course, we have no idea as to the magnitude and if it's significant or not. But this is big news, China loosening credit and a trade deal will sent the markets up.

So the whole thing is a game of chicken between Trump gaming his election strategy, China on the other side and the Fed in the middle with lowering rates.

Because we don't have the classic signs of a market top, exuberance, personally I suspect there is another leg to go. Having said that, I loaded up on silver a month back, as insurance on Brexit, lower rates etc. which has done well. Still, many of the power firms in IUSU pay a tidy dividend between 2% - 4% which will become attractive if rates in the US drop. Certainly rates are unlikely to rise, so I would have thought it's a safe buy.

Utilities index tracker vs total index tracker: Recession warning?

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William K

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