Global X House Views – October 2022
For more than a decade, Global X ETFs’ (Global X) mission has been empowering investors with unexplored and intelligent solutions. To do so, Global X focuses on providing the market with in depth, industry leading research. Please see our House Views for October 2022 below – including investment outlook and opportunities.
The Reserve Bank of Australia (RBA) renewed hopes of a broader central bank policy pivot on October 4th 2022 with a lower-than-expected 25 basis points (bps) hike. The decision triggered an aggressive two-day rally which saw the S&P/ASX 200 soar almost 5.5% to 6815.6 from its September lows around 6456.1 Optimism was dampened after San Francisco Fed President, Mary Daly said the US central bank was “resolute at raising the interest rate into restrictive territory” to tackle inflation.2 Locally, confidence is falling as consumers react to economic concerns and inflation expectations rise.3 As such, Australian investors will be watching intently to see whether the hawkish Fed spooks the RBA’s dovish coo.
Central banks have increased interest rates at the fastest rate on record.4 The Federal Reserve’s (Fed) commitment to bring inflation under control has global economic implications through a stronger dollar, and most central banks have now turned to a more aggressive approach with their interest rate increases amid stubbornly high inflation and currency weaknesses. Additionally, given that each central bank is focused on balancing their nation’s supply and demand, there is the risk that the cumulative negative impact on global economic growth could be greater than expected.
Asset Class Views
Global X expects market volatility to remain elevated through the interest rate hiking cycle. Following Jackson Hole and the Federal Open Market Committee (FOMC) meeting held in September 2022, markets have priced in a more aggressive interest rate hiking cycle for the fourth quarter and into early 2023. At this stage, Global X prefers equities over fixed income because real yields are still in negative territory. With rising recession risks, Global X believes it is increasingly important to incorporate a barbell approach that includes longer-duration income like exposures to long duration U.S. Treasuries.
Global X prefers commodities over other assets, but with a somewhat more muted outlook. A strong dollar and tightening financing conditions could make some commodities slightly less attractive at this stage. Uncertainty in China also clouds the outlook for economic growth focused commodities.
Sub Asset Class & Industry Views
Global X has an increased focus on defensive segments with strong cash flows. Preferred sectors include Health Care, Consumer Staples, and Utilities while discretionary consumption remains an area of uncertainty.
Inflation protection could be balanced with quality, defensive equity positions. Global X also view assets tied to derivatives like covered call strategies and those targeting rising interest rates as potentially attractive with volatility remaining elevated.
Covered call strategies that sell options premiums on some of the major U.S. indexes like the Nasdaq 100 or S&P 500. Markets sold off in September, continuing the push and pull nature of the equity markets recently. Selling options premiums to monetise volatility and stay invested could be appealing to investors.
- Silver and silver miners present opportunities. Attractive valuations for silver miners, notable pessimism on silver futures, and a high gold-to-silver ratio point to a possible rebound. Besides, silver is used to make photovoltaic cells, and solar playing major roles in Europe’s clean energy transition and the Inflation Reduction Act create structural tailwinds. A possibly more stable dollar, inverted U.S. Treasury yield curve and higher recession risks in the coming months may remove some of the headwinds to silver.
- Elevated lithium prices continued to drive revenue growth for lithium miners in Q3 2022, while the environment remained a point of pressure for battery manufacturers. Given the ongoing high price environment for lithium and expected widening supply-demand gap, lithium producers continued to look towards expanding production and brining new projects online. For example, in September 2022, Piedmont Lithium announced plans to build the largest lithium hydroxide plant in the U.S. in Tennessee. The plant, which has a production target of 30,000 metric ton per year, is expected to begin operations in 2025.5
- Uranium is a specific segment of the energy market with attractive supply & demand fundamentals, and a changing narrative around nuclear energy. Many countries have either been integrating nuclear power into their energy agendas or have been delaying planned phase outs, bringing additional demand for uranium to the surface.
- Interest rates rose substantially this year as sticky inflationary pressures and the Federal Reserve’s subsequent rate hikes caused a spike in bond yields. With the 10-year yield sitting at 3.77% as of September 29th2022, Global X believes this could be an entry point for certain duration sensitive assets with stronger yield profiles.
Equity markets have been trending down for most of Q2 and Q3 2022. For investors, one way to tackle this may be by taking a more nuanced approach towards equities. One solution Global X prefers in this market environment are covered call strategies, which benefits when market volatility increases given that call writing premiums are positively correlated to volatility. Given that the US Fed has taken a hawkish stance, the potential income collected from covered call writing could be particularly attractive to offset some potential market declines. Another possible solution is for investors to make their equity exposure more internationally oriented towards the US, as the strong dollar affects global markets, but helps provide a tailwind to overseas investments and a more positive outlook on the US economy relative to the rest of the world.