Investors could face a variety of challenges as we head toward the end of the year. Given that there is no one-size-fits-all solution, we believe sectors can be used selectively to address specific issues, such as inflation, tapering and portfolio quality. Within sectors, we currently favour Europe versus the US or global exposures.
Solving for specific issues
Virtually all investors want higher returns and minimised risk, but the way to achieve these goals over the last four months of 2021 seems more complicated than ever. Currently, it does not feel as simple as growth versus value or cyclical versus defensive given the many concerns we face in this near post-COVID world.
One way to approach markets is to consider the biggest issues facing investors and solve for those that are most pertinent to your outlook, portfolio or required returns.
We’re all watching the data. Just as investors are watching the pace of economic recovery and inflation, so are Jerome Powell and company in order to determine the pace of reducing asset purchases. This gives economic figures great importance to markets and provides a role for sector investing. Sectors offer a historically proven way to target different macroeconomic scenarios.
Picking up the baton with Europe
We favour Europe, particularly compared with the US. Europe has been slower to reopen, suggesting more recovery to come, and the region has monetary stimulus provided by central banks and fiscal plans, including the EU Recovery fund, to provide substantial support. The ECB meeting last week confidently raised the forecast for eurozone GDP growth for 2021 to 5%.1 With a discount rating of approximately 15% to MSCI ACWI and double that to the S&P 500, as well as relatively attractive dividend yields, we believe there is a valuation argument for MSCI Europe as well.
Let’s consider the big issues and potential solutions within European sectors.
Transitory pressures or not, the current inflationary phase is lasting longer than most commentators expected and investors who want to benefit could look to Materials. European Materials is 33% weighted to mining stocks, producers of industrial metals that form a large part of the commodities complex, which has seen a spike this year.
Key to these companies passing on price increases is supply and, thus far, companies appear to be disciplined with capital expenditure plans, not adding to new mining capacity. Even with an increase, such facilities can take many years to come online, leaving a tight demand/supply balance for some time. Commodities, such as copper, continue to be in high demand for building and construction, fulfilling projects enabled by fiscal spending, and meeting newer green markets such as electric vehicles.
Looking at State Street proprietary institutional flows data, we have seen buying across Materials companies (miners, chemical producers and construction material suppliers) in recent months. While consumer strength has driven robust volumes for packaging and specialty chemicals for consumer products, recovering industrial production (as measured by Markit PMIs) has boosted demand for many raw materials.
Much has been said about when tapering may start, but less about how to solve for it. While the Federal Reserve has grabbed headlines, it is also an issue for the ECB and Bank of England. The policies of all these central banks will matter to financial companies in Europe. Reducing quantitative easing is the first step toward policy normalisation. Inevitably, as soon as the tapering of bond purchases starts, the market will then focus on when the first base rate rise will be. Strengthening bond yields and any steepening of yield curves would be beneficial to banks, feeding through to their borrowing and lending rates, which dictate net interest margins.
Banks constitute 45% of Europe Financials, and even more if the banking operations of investment banks are included. Life and general insurers (insurance has a 31% weight) could also benefit from higher returns on higher bond yields. Meanwhile, the health of financial markets has been helpful to many insurance providers as well as the exchanges and financial services companies that make up the rest of the sector.
Another theme for the rest of 2021 is likely to be dividends and share buybacks. Distributions from European banks were restricted during the worst of the COVID crisis and the return of share buybacks and dividend increases would be warmly welcomed by investors.
Quality: Health Care
The Health Care sector could offer a degree of quality to investor portfolios or provide lower volatility or defensive growth. The sector has all of these characteristics by virtue of its products and services, increasingly demanded by a growing, ageing and more prosperous global population. The quality tag can be seen in high returns on capital, healthy cash flow and stability of earnings.
For those looking for a comfortable mid-cycle investment, pharmaceutical and biotech companies and their suppliers tend to be less sensitive to rising interest rates. While the COVID pandemic provided significant upside for companies with successful testing and vaccine solutions, there is also a reopening theme for providers who were hit by cancelled medical operations and doctor visits. Meanwhile, given the virus continues to spread, testing, antibody therapies and booster vaccines are all likely to be in demand. Meanwhile, mRNA technology has emerged as a key area for innovation.
US political interference to drug pricing, more regulation and anti-trust enforcement remain, but they appear to be low on president Biden’s agenda compared with COVID and stimulus plans. Nevertheless, we prefer Europe for lower exposure to US political risk.
Diversification: Real Estate
Most investors we’ve spoken to recently want to stay invested in equities but would also like to reduce their risks. One way to do this is to diversify by asset class, geographic income and sector drivers.* Real estate is often used as an alternative asset as it is driven by different economic dynamics and has a relatively low correlation with equities. Accessing real estate via a fund of REITs and property companies, which span an array of industries, provides diversification in another way.
This year, European real estate has seen a merger between the two largest quoted stocks, creating a powerhouse in the German residential market. Other holdings within the sector are well placed for the reopening trends in retail, offices and other commercial operations.
Real estate ownership aims to provide natural protection against inflation. Real estate rents and values tend to increase when prices rise, with many leases tied to inflation. This supports cash flow and thus dividend growth, providing a reliable stream of income even during inflationary periods.
Readers familiar with our institutional flows analysis available in the latest monthly update to the Sector & Equity Compass will know that Real Estate stands out as the sector with the most extreme underweight positioning.
Contrarian Opportunity: Energy
Most investors accept that the potential for higher returns comes with higher risk, and Energy is a case in point. The European sector was a top performer in Q1 2021, made a sharp turn in Q2 and has (until recently) been the bottom performer this quarter to date. During the recent period of underperformance, earnings forecasts have continued to rise in response to higher crude oil prices this year and a still-restricted supply response, leaving the sector significantly derated.
From here, the sector can help those looking for positive sensitivity to inflation, strong earnings sentiment and extreme valuation lows. Energy is widely used to position an economic outlook and was an important part of the reflation trade earlier in 2021; there are signs this trade could return. Energy ETFs saw the highest level of net inflows among European sector ETFs last month as well as year to date.
As with the Real Estate and Health Care sectors, Energy is also a large underweight position on average across institutional investor portfolios. For Energy, a large part of its unpopularity is its responsibility for carbon emissions and the necessity to reduce them and consider climate change. European oil and gas companies have been quicker to respond than their international counterparts. We are a long way from acknowledgment of climate change by major players to transition, but the majors have the technical knowledge, logistical and geographic reach to help deliver solutions needed to help affect change.
How to Play these Themes
Investors who are interested in playing the themes described above can do so with SPDR ETFs. To learn more about these funds, and to view full performance histories, please follow the links below.
TER reduction for SPDR MSCI Europe sector range
As of 13 September 2021, we have reduced the TER on our 10 MSCI Europe sector ETFs from 0.23% to 0.18%.
1The estimate is based on certain assumptions and analyses. There is no guarantee it will be met.
* Diversification does not ensure a profit or guarantee against loss.
Information Classification: General Access.
For professional clients use only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.F: +49 (0)89-55878-440.
For Investors in Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
For Investors in France: This document does not constitute an offer or request to purchase shares in the Company. Any subscription for shares shall be made in accordance with the terms and conditions specified in the complete Prospectus, the KIID, the addenda as well as the Company Supplements. These documents are available from the Company centralizing correspondent: State Street Banque S.A., Coeur Défense - Tour A - La Défense 4 33e étage 100, Esplanade du Général de Gaulle 92 932 Paris La Défense cedex France or on the French part of the site ssga.com/etfs. The Company is an undertaking for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS in accordance with European Regulations. European Directive no. 2014/91/EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France.The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214-2-2 of the French Monetary and Financial Code.
For Investors in Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. Telephone: +49 (0)89-55878-400. Facsimile: +49 (0)89-55878-440.
Ireland: State Street Global Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.
Israel: No action has been taken or will be taken in Israel that would permit a public offering of the Securities or distribution of this sales brochure to the public in Israel. This sales brochure has not been approved by the Israel Securities Authority (the ‘ISA’).
Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution.
This sales brochure may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent.
Nothing in this sales brochure should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”). Investors are encouraged to seek competent investment advice from a locally licensed investment advisor prior to making any investment. State Street is not licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder.
This sales brochure does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Securities offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation.
Italy: State Street Global Advisors Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is a branch of State Street Global Advisors Europe Limited, registered in Ireland with company number 49934, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Italy is registered in Italy with company number 11871450968 - REA: 2628603 and VAT number 11871450968, and its office is located at Via Ferrante Aporti, 10 - 20125 Milan, Italy. T: +39 02 32066 100. F: +39 02 32066 155.
For Investors in Luxemburg: The Companies have been notified to the Commission de Surveillance du Secteur Financier in Luxembourg in order to market its shares for sale to the public in Luxembourg and the Companies are notified Undertakings in Collective Investment for Transferable Securities (UCITS).
Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions.
Norway: The offering of SPDR ETFs by the Companies has been notified to the Financial Supervisory Authority of Norway (Finanstilsynet) in accordance with applicable Norwegian Securities Funds legislation. By virtue of a confirmation letter from the Financial Supervisory Authority dated 28 March 2013 (16 October 2013 for umbrella II) the Companies may market and sell their shares in Norway.
For Investors in Spain: State Street Global Advisors SPDR ETFs Europe I and II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. Before investing, investors may obtain a copy of the Prospectus and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of State Street Global Advisors SPDR ETFs Europe I and II plc from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain or at spdrs.com. The authorised Spanish distributor of State Street Global Advisors SPDR ETFs is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores).
Switzerland: The collective investment schemes referred to herein are collective investment schemes under Irish law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual reports free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at ssga.com.
United Kingdom: The Funds have been registered for distribution in the UK pursuant to the UK’s temporary permissions regime under regulation 62 of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019. The Funds are directed at 'professional clients' in the UK (as defined in rules made under the Financial Services and Markets Act 2000) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Funds, and compensation will not be available under the UK Financial Services Compensation Scheme.
This document has been issued by State Street Global Advisors Europe Limited (“SSGAEL”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web: ssga.com.
SPDR ETFs is the exchange traded funds (“ETF”) platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.
State Street Global Advisors SPDR ETFs Europe I & II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Please see the fund’s prospectus for more details.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The views expressed in this material are the views of SPDR EMEA Strategy & Research through the period ending 9 September 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Past performance is not a guarantee of future results.
Investing involves risk including the risk of loss of principal.
This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Concentrated investments in a particular sector tend to be more volatile than the overall market and increases risk that events negatively affecting such sectors or industries could reduce returns, potentially causing the value of the Fund’s shares to decrease.
Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).
There are risks associated with investing in Real Assets and the Real Assets sector, including real estate, precious metals and natural resources. Investments can be significantly affected by events relating to these industries.
Standard & Poor’s, S&P and SPDR are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss Regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
You should obtain and read the SPDR prospectus and relevant Key Investor Information Document (KIID) prior to investing, which may be obtained from spdrs.com. These include further details relating to the SPDR funds, including information relating to costs, risks and where the funds are authorised for sale.
© 2021 State Street Corporation.
All Rights Reserved.