As investors position their portfolios for the rest of the year, Deutsche Asset Management suggests looking to international and factor-based or smart beta exchange traded funds to potentially enhance returns ahead.
On the recent webcast (available on-demand for CE Credit), 2017 Mid-Year Outlook and ETF Strategy Review, Phil Poole, Managing Director at Deutsche Asset Management, painted an upbeat picture for the global economy ahead, with the current economic cycle in good shape, showing moderate growth and inflation expectations.
Looking ahead, Deutsche Asset Management believes the Federal Reserve will undertake gradual rate hikes and maintain a shallow interest rate profile. The central bank could hike rates late in the year and another once or twice in the first half of 2018, along with scaling back reinvestment of the its maturing securities by year end.
“We expect the Fed will remain in tightening mode,” Poole said. “However, there is still little sign of overheating and inflation also remains below target, so the Fed is unlikely to move aggressively. A gradual pace of reducing policy accommodation remains the most likely course.”
Across the pond, the European Central Bank could move toward tapering or at least begin plans sometime over the summer due to the scarcity of bonds. The ECB will also likely assuage market fears by stating that the tapering can be stopped any time to avoid market shocks.
“We expect a tapering announcement in September/October with further cuts in purchases from January 2018 onward and the purchase program is likely to end during H2 2018,” Poole said.
In Japan, the Bank of Japan continues to combat a low inflation environment, along with structural deflation. Consequently, the BOJ could maintain its dovish stance to support growth.
“A 2% inflation target is inappropriate; policy to stay highly accommodative,” Poole said.
Looking at the equity market, Robert Bush, ETF Strategist for Deutsche Asset Management, believed that steady earnings growth will help support an ongoing rally in major indices, but investors may consider European and emerging markets where valuations seem relatively more favorable.
“EPS upgrades in Eurozone along with positive earnings growth in most sectors. Investors have to worry less about poltiical threats. We retain our overweight on the region,” Bush said.
“We retain our overweight on EM, particularly Asia ex. Japan, as the economic landscape stays supportive and valuation are reasonable,” he added.
Related: 3 Strategic Reasons Advisors Should Adopt Factor-Based ETFs
However, investors seeking international market exposure should consider potential currency risks as Deutsche projects a stronger dollar or weaker foreign currencies ahead.
“We believe that the forces which have strengthened the dollar are waning,” Bush said.
Investors can turn to currency-hedged ETFs to limit foreign exchange currency risks. For example, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF) tracks developed Europe, Australasia and Far East countries and hedges against depreciation in related currencies. The Deutsche X-trackers MSCI All World ex US Hedged Equity ETF (NYSEArca: DBAW) provides broad market exposure by following a market cap-weighted index of international stocks, excluding U.S. exposure and hedging against depreciation in the underlying currencies against the U.S. dollar. Additionally, the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM) targets the emerging markets.
In the fixed-income space, Thomas Bouchard, Director and Portfolio Manager for High Yield Strategies at Deutsche Asset Management, pointed to the strong performance of the high-yield segment, especially in a more risk-on environment. Trading volume for speculative-grade debt space remains strong. While default rates have modestly increased, high-yield issuer balance sheets remain healthy, dampening risk exposure.
Investors interested in gaining exposure to high-yield debt may consider a bond ETF option like the Deutsche X-trackers USD High Yield Corporate Bond ETF (NYSEArca: HYLB).
Sean Edkins, Director, ETF RVP at Deutsche Asset Management, also pointed to multi-factor ETF strategies as a way for investors to potentially enhance equity exposure through a transparent and rules-based process to focus on the best companies in the market.
For instance, investors may consider the Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS), Deutsche X-trackers Russell 2000 Comprehensive Factor ETF (NYSEArca: DESC), Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF) and Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG), which combine five single factors into a multi-factor strategy, including value, size, momentum, low volatility and quality.
Financial advisors who are interested in learning more about Deutsche Asset Management’s outlook can watch the webcast here on demand.