ETF portfolio: coronavirus weighs on returns of ‘cheap’ stock markets

It’s been rough going, as tourism and oil-dependent economies suffer, while export-focused Korea and China await the global recovery.

Things are still not going well for our global value portfolio. Over the three months from 2 March to 31 May, the portfolio lost over 8%. That continues the trend from the previous quarter, bringing the portfolio’s total decline since its inception to -15.2%. No prizes will be given for guessing the global Covid-19 pandemic is the primary culprit behind these losses.

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No tourists

The worst performance in the portfolio came from the Global X FTSE Greece 20 ETF (GREK), which lost over 12% this quarter. It is worth noting that Greece’s main market had a strong rally in 2019. By buying in September, despite the index being ‘cheap’ based on the cyclically adjusted price/earnings ratio (Cape) ratio, we likely still bought it at its peak.

However, over the past quarter the Greek economy has seen major damage due to its reliance on tourism. Mobeen Tahir, associate director of research at WisdomTree, notes that the country’s economy is “suffering immensely” due to the lockdown. He notes: “Tourism revenues fell by nearly 70% year-on-year in March, and the industry has revised down its expectations for the rest of the summer, given ongoing travel restrictions.”

When it comes to Singapore, performance was also bleak, with a loss of 13.5%. According to Tahir, Singapore’s export-dependent economy faces its steepest fall in GDP since the country gained independence in 1965. It could, however, have been worse. Since the start of the crisis Singapore has announced four fiscal stimulus packages, totalling nearly 20% of the country’s GDP.

Elsewhere, Spain’s main market took a beating over the past three months, with our ETF down over 16%. During March, Spain emerged as an epicentre of the pandemic in Europe, to which the government responded with one of the strictest lockdowns on the continent. This clearly took a toll on the country’s economy and main index.

Our Russia holding also continued to slide, for two reasons. First, as Tahir notes: “The Russian economy has taken a meaningful hit from the ongoing pandemic. Services and manufacturing PMIs dropped sharply in April.” Second, the Russian economy has had to deal with the fallout of the oil price war with Saudi Arabia during March.

Early exposure

Generally, better performance appears to have come from those countries hit first by the virus. As the place of origin of the disease, China was the first to go into strict lockdown and the first to emerge from it. “Economic activity gradually resumed over April and May,” says Tahir.

However, that hasn’t stopped China seeing some price declines.

Over the past three months, the iShares MSCI China A UCITS ETF (IASH) has lost 3.5%. That, however, is way below what was suffered by most other holdings in our portfolio.

It is also worth noting that the China ETF probably also fell on a renewed sense of political risk associated with the country. Tensions with the US have once again heated up, particularly following concern that Beijing’s new National Security Law could result in the end of Hong Kong’s autonomy. However, despite these concerns, since launch this holding’s return is positive, albeit only by 1.5%.

The best performer over the quarter was the iShares MSCI Korea ETF (IKOR). In its successful containment of the pandemic, South Korea has won global praise. As a result of this success, the country has had to enforce fewer lockdown restrictions, which has been good news for its domestic economy. Of course, being a heavily export-dependent economy, it has not escaped fears of slowdown in global growth, hence its performance is still in negative territory over the period.

Looking ahead

The hope for the portfolio’s performance in the next three months is that countries continue to successfully contain the pandemic, economies reopen and growth returns. A second wave would of course take a further toll on our holdings.

The big risk with China is escalating tensions with the US. However, prospects look worst for Russia. Demand for oil remains subdued, keeping the price low. Russia also appears to still be struggling to get the virus under control, dimming prospects of its economy re-opening.

China and Korea holdings in positive territory since inception

Notes: The portfolio comprises the eight most undervalued markets in the world in terms of Cape (cyclically adjusted price/earnings) ratio at launch on 2 September 2019. Portfolio runs for 12 months without adjustment and is then rebalanced. Sources: Market data from Sharepad, as at 31 May 2020. Cape ratios from StarCapital, as at 11 May 2020. Due to an issue with Sharepad data our figures for the Greek ETF were worked out by our own calculations based on the ETF’s historic share price.