Many commentators have suggested stocks to buy during this sharemarket correction. Another strategy for active investors is buying the market in anticipation of a recovery in the fourth quarter.
Exchange-traded funds (ETFs) are ideal in this regard. They seek to replicate the price and yield performance of an underlying index, and are bought and sold like shares on ASX. ETPs are a multi-trillion-dollar market globally and growing quickly in Australia off a low base.
The S&P/ASX 200 index has fallen 14 per cent from a 52-week high of 5,996 points in April to 5,098 points. China-led volatility and a disappointing local earnings season have driven the index lower. It is well and truly in technical-correction territory and may fall further yet, possibly even enter a bear market if the falls extend beyond 20 per cent.
However, the selling looks overdone. The market is back in line with its long-term Price Earnings (PE) multiple and the US Vix index, a measure of US equity market fear, is trending lower after spiking in August. I don’t expect our sharemarket to recover its losses in a hurry, but the odds favour a mild rally in the seasonally stronger fourth quarter.
Several equity strategists have lowered their year-end targets for the ASX 200. For example, AMP Capital chief economist Dr Shane Oliver predicts 5,500 for the ASX 200, from 6,000 previously. If he is right, the index would rise 8 per cent by December 31.
A gain of that order, over three months, can make a big difference to portfolios that have been battered in the correction. Investors can use an ETP over the ASX 200 to benefit from a potential fourth-quarter bounce, and take less risk, by being exposed to a basket of stocks.
I favour narrowing that exposure to the ASX 100. When funds are redeployed to equities during market corrections, they usually find their way first to the biggest and best companies – and the highest-quality ones offer more safety during market volatility.
A new ETP, the ANZ ETFS S&P/ASX 100 index is the only ASX-quoted broad-based index covering the top 100 companies. Several other ETPs cover the ASX 200, ASX 2o or S&P/ASX Small Ordinaries index. Investors who believe the market will rally into year-end and the New Year could use this ETP to gain exposure to the ASX 100.
The chart below shows the ASX 100 index over five years:
Another of this column’s favoured themes is continued weakness in the Australian dollar, relative to the US dollar. One more Australian interest-rate cut, and the expected first interest-rate rise in the US in the fourth quarter, will pressure our currency. Further falls in commodity prices will also weigh on a currency that remains overvalued.
Several economists expect the Australian dollar to head towards US60 cents over 2016. If they are right – their track record on currency forecasting is poor – our dollar would fall 16 per cent over this year and next, from the current US72 cents.
Nobody knows for sure where our dollar will end by then, but the trend is down. One way to play this opportunity is through ASX-quoted currency ETPs that provide exposure to a rising Greenback.
The ASX-quoted Betashares US dollar ETF provides simple, low-cost exposure to the US dollar relative to the Australian dollar. For example, if the US dollar rises by 10 per cent against our dollar, the ETP is designed to rise 10 per cent. Its management fee is 45 basis points annually.
The ANZ ETFS Physical US Dollar ETF also provides exposure to the US dollar against the Australian dollar. It too has a 45 basis point fee.
The chart below shows the US dollar against the Australian dollar:
For long-term portfolio investors, I favour the iShares Global Healthcare ETF and iShares Global Consumer Staples ETF, both of which have featured in this column. The iShares Global 100 ETF, which gives exposure to 100 of the world’s largest companies, is another favourite.
The sharemarket correction has created a more attractive entry point to gain exposure to a basket of global healthcare stocks, via the ASX-quoted iShares Global Healthcare ETF, which provides exposure to a basket of the world’s largest healthcare multinational companies.
Few sectors have better long-term prospects as the population ages. By 2050, people aged 60 or over will exceed the number of children for the first time, the United Nations predicts. The world’s older population will more than double to two billion, nearly eight in 10 will live in emerging economies, and almost 400 million will be aged 80 or over.
Rising demand for healthcare products and services – and rising healthcare company earnings – over the next decade is inevitable.
iShares Global Healthcare ETF
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at September 15, 2015.