Exchange traded fund investors will have to weigh global growth prospects with potential market hurdles for the rest of the year.
On the recent webcast, Expert Mid-Year Outlook & Strategy: Bernstein, RiverFront, and Deutsche Asset Management, Peter Hooper, Managing Director & Chief Economist at Deutsche Bank Securities, argued that we are still on a growth trajectory, but investors should watch for potential shocks that could throw a wrench into the system.
Looking ahead, Hooper points to key drivers of the U.S. growth like consumer spending and a strengthening housing market, but falling net exports and diminished capital expenditure could weigh on long-term growth.
Specifically, a number of factors still support a positive outlook. For example, household balance sheets are supportive and consumer confidence is at pre-crisis norms. Moreover, the housing industry construction still has a way to go before hitting historical norms. The housing market is tightening, with vacancies below trend.
On the other hand, some factors are keeping a lid on growth. For instance, a strong U.S. dollar weighs on exports. The ongoing preference for stock buybacks and dividend payouts have diminished capital expenditure, which could hurt U.S. companies over the long-run.
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The closely watched Federal Reserve’s monetary policy has also kept markets on their toes. However, Hooper predicts a July rate hike will not be likely since we still require strong labor numbers, higher inflation, greater economic growth and financial calm after the so-called Brexit vote.
In a survey of advisors on the webcast, 46% of respondents pointed to European political risks, such as the potential fallout from a Brexit vote, as the largest concern going into the second half of 2016, followed by 31% of respondents looking at a strong U.S. dollar.
“The next U.S. recession is likely several years away and caused by more aggressive Fed tightening,” Hooper said.
[related_stories]Richard Bernstein, Chief Executive Officer of Richard Bernstein Advisors, also believes markets will continue to maintain its momentum, pointing to late-cycle profits rebounding, coupled with fantastic sentiment. He also argued we may see accelerating company profits after the markets moved past the worst profits recession in the fourth quarter last year.
“investor sentiment is overly bearish,” Bernstein said.
In an aging market rally since the financial downturn, Bernstein forecasts a late cycle earnings-driven bull market for the rest of the year, with cyclicals outperforming and low-quality outperforming high-quality companies.
The survey of advisors also revealed that the majority 36% of respondents think the U.S. will have the largest opportunities for the second half of 2016, with 41% believing U.S. equity ETPs will capture the strongest inflows for the rest of the year.
Investors may also want to consider international equity exposure as foreign markets remain undervalued, Michael Jones, Chairman & Chief Investment Officer of RiverFront Investment Group, said. The MSCI EAFE Index, which tracks foreign developed markets, has shown a 6.4% total return from 1970, but the MSCI EAFE Index is currently trading 37.9% below its long-term trend.
“In our view, developed international stocks are the most attractive asset class, with corporate bonds the best bond option,” Jones said.
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Investors should also consider diversifying with international stocks for potentially enhanced long-term returns.
“Since 2002, a portfolio composed of half U.S. equities and half the MSCI EAFE Index would have produced a reward-to-risk ratio in excess of either region alone,” Theresa Brennan, ETF Investment Specialist at Deutsche Asset Management, said. “This was driven by the relatively low correlation between these two markets, which, over this same period, was 0.53.”
ETF investors can look to the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), which tracks developed Europe, Australasia and Far East countries, as a way to gain exposure to these developed markets. DBEF also includes a currency hedged component, which may diminish the negative effects of depreciating foreign currencies or a stronger U.S. dollar.
Moreover, the Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF) tracks an enhanced beta FTSE Russell indices that target quality, momentum, value, size and volatility – five key factors many financial institutions have looked at to help gain an edge over traditional beta indexing methodologies.
Lastly, the Deutsche X-trackers MSCI EAFE High Dividend Yield Hedged Equity ETF (NYSEArca: HDEF) can help investors target yield-generating opportunities. The undelrying high-dividend-yield index select companies with high yields and screen for quality, including return on equity, earnings variability and debt-to-equity. Additionally, HDEF utilize forward currency contracts to diminish the negative effects of an appreciating U.S. dollar or weakening foreign currencies over the short-term.
Financial advisors who are interested in learning more about market headwinds and opportunities ahead can watch the webcast here on demand.