Using Volatility and Momentum to Identify Domestic, International Opportunities

The rebound in equities thus far in 2019 have allowed investors to pick themselves up and dust themselves off after a market spill to end 2018. With U.S. equities seeking their retribution in the first quarter of 2019 after a tumultuous fourth-quarter end to 2018, it’s easy to have a home team bias for investors domestically.

However, as the U.S. capital markets make their way out of the late cycle, it can be opportunities overseas that can be more attractive alternatives. As such, investors need to build their portfolios with a global perspective in mind and Jason Bloom, Invesco’s Director of Global Market Strategy spoke with ETF Trends to pinpoint opportunities to be had in the current market landscape–not just in the U.S., but worldwide.

Dissecting a U.S.-China Trade Deal

Most experts operating within the capital markets agree that a U.S.-China trade deal is the primary trigger event that could benefit everyone globally, whether they feel a deal has already been priced into equities or not. However, while negotiations are ongoing with a trickle of news alluding to a trade deal nearing, Bloom cites that resolving a trade war could be far from over.

“This is not going to be resolved quickly or easily,” said Bloom.

“It’s not just a political strategy by Donald Trump–this sense of a threat from China has been embraced structurally by the U.S. government. I think it’s going to drive out policy for years to come–the current administration or others,” Bloom added.

The idea of the trade war continuing would certainly send the markets south. Combined with fears of slowing global growth and a reduction in corporate earnings, an ongoing trade war would certainly add to the growing wall of worry for investors.

This could all translate to oscillations in the market that could rack investors for the foreseeable future if a protracted trade war does indeed materialize.

“The volatility that is the result of the uncertainty and this clash I believe will persist for years,” said Bloom, referring to the potential of a U.S.-China trade deal going awry.

Trade wars, as mentioned, would feed into a slowdown in global growth–something the International Monetary Fund (IMF) is quick to identify. The IMF recently cut its global growth forecast to the lowest level since the financial crisis, citing the impact of tariffs and a weak outlook for most developed markets.

According to the IMF, the world economy will grow at a 3.3 percent pace, which is 0.2 percent lower versus the initial forecast in January. While this could lead to a spike in volatility, there are opportunities to be had sifting through the markets with a low volatility screener.

“So unfortunately, that’s not great news for global growth, but it does give you an edge–if volatility is going to be high on the equity side, low volatility equity screens have traditionally been an excellent way to position for that.” said Bloom.

Investors can look to funds like the Invesco S&P MidCap Low Volatility ETF (NYSEArca: XMLV), which seeks to track the investment results of the S&P MidCap 400 Low Volatility Index . Strictly in accordance with its procedures and mandated guidelines, the index provider selects for inclusion in the underlying index the 80 securities that it has determined have the lowest volatility over the past 12 months out of the 400 medium capitalization securities that are contained in the S&P MidCap 400 Index.

Another option is the Invesco S&P SmallCap Low Volatility ETF (NYSEArca: XSLV) that seeks to track the investment results  of the S&P SmallCap 600 Low Volatility Index. S&P DJI selects for inclusion in the underlying index the 120 securities that it has determined have the lowest volatility over the past 12 months out of the 600 small-capitalization securities that are contained in the S&P SmallCap 600 Index.

China Exodus Could Benefit EM

While the majority of investors might have been driven away by the red prices in emerging markets during much of 2018, savvy investors who were quick to see the opportunity viewed EM as a substantial markdown. From a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue.

Bloom recalled a visit to China where conversations with locals revealed a trend that could continue to benefit the EM space–businesses domiciled in China moving to other geographies in order to blunt the impact of trade wars.

“Every single person I talked to had either a friend or relative whose company is moving their operations out of China into another emerging market country to get out of the tariffs,” said Bloom.

“We could see China’s loss become the gain of others and you might even see–who knows, when those dynamics change whether the momentum is negative or net positive–as those other EM countries begin to benefit and grow from that,” he added.

Ongoing U.S.-China trade negotiations and geopolitical tensions put emerging markets in a state of unease in 2018, but investors can now look to their resurgence in 2019. Once again, this is where volatility and momentum screeners can assist.

Using Low Volatility, Momentum Screeners for EM

Like a protracted trade war, the benefits of having a low volatility screener would be advantageous to the investor looking for opportunities within the EM space. Essentially, it could ferret out EM companies that would exhibit signs of more quality-oriented investments.

“The low vol(atility) screen will basically be moving away from the distressed–those companies that are hurting the most,” said Bloom.

“If you start to see broader EM stabilize and move to the momentum screen once again, let the market tell you who the winners as they emerging rather than trying to predict,” said

In essence, Bloom suggests that momentum can be the best guide to identify profitable investments in EM and beyond. While investors are sifting through the plethora of opportunities the EM space has to offer, momentum can provide valuable insight.

“You don’t need to be able to predict the future to capture the winners–you just let those factor-based disciplines do that for you,” said Bloom.

Investors can look to funds like the Invesco S&P Emerging Markets Low Volatility ETF (NYSEArca: EELV), which seeks to track the investment results of the S&P BMI Emerging Markets Low Volatility Index, which is designed to measure the performance of 200 of the least volatile stocks of the S&P Emerging Plus LargeMidCap Index.

Additionally, there is also the Invesco S&P Emerging Markets Momentum ETF (NYSEArca: EEMO), which seeks to track the investment results of the S&P Momentum Emerging Plus LargeMidCap Index. Strictly in accordance with its guidelines and mandated procedures, the index provider compiles, maintains and calculates the underlying index, which is composed of constituents of the S&P Emerging Plus LargeMidCap Index that have the highest “momentum score.”

For more market trends, visit ETF Trends.