BMO Canadian ETF Dashboard

— as of September 30, 2019 —

Thank you for printing our content at https://www.bmoetfs.ca/en/trade-tips/defensive-diversification-in-late-cycle-markets/.

Defensive Diversification in Late Cycle Markets

Natalia Moreno

Defensive Diversification in Late Cycle Markets

Snapshot
As we move into the latter stages of an extended business cycle, global growth has continued to slow down. Some countries have fared better than others with those more dependent on trade being hit the hardest.

Investors looking to defend against potential late cycle volatility should consider investing in BMO low-volatility ETF strategies. When investing specifically in international markets, investors can access BMO Low Volatility International Equity ETF Hedged to CAD (ticker: ZLD).

Details
BMO Low Volatility International Equity ETF Hedged to CAD (Ticker: ZLD)

Benefits
As a late cycle brings more volatility, investors become wary of equity markets. To stay invested and control broad market risk (beta), investors may look to defensive strategies. ZLD provides investors with the opportunity to access international markets defensively.

Trade Idea
ZLD is exposed to equities across developed markets (EAFE) countries in defensive sectors, including Consumer Staples, Real Estate and Utilities. The Fund’s geographic and sector exposures complement an equity portfolio composed primarily of S&P TSX stocks.

Sector Comparison (%) of ZLD vs. S&P TSX

ZLD S&P TSX Diff
Communication Services 9.78 5.64 4.15
Consumer Discretionary 9.73 4.26 5.47
Consumer Staples 12.57 4.09 8.48
Energy 1.14 16.54 -15.39
Financials 5.19 31.78 -26.59
Health Care 9.42 1.56 7.86
Industrials 16.67 11.17 5.50
Information Technology 2.10 5.43 -3.33
Materials 3.28 11.39 -8.11
Real Estate 15.03 3.58 11.46
Utilities 14.67 4.55 10.44

Source: Bloomberg, as of September 23, 2019.

When comparing ZLD to the broad market index (MSCI EAFE Hedge to CAD Index), ZLD has outperformed the index during periods of market volatility and fallen behind in upward trending markets. This is because ZLD invests in securities with low beta (broad market risk exposure) that outperform when volatility picks up.

Oct-2019-graph-a.jpg#asset:3359

EAFE countries have been bruised by slower growth out of China, trade tensions between the U.S., and China and Brexit uncertainty. As these issues continue to put pressure on markets, central bank accommodation should provide some stimulus to EAFE economies and support to equity markets indirectly.

Eurozone PMI Showing Worrisome Signs
EURO AREA - headline readings from the latest PMI surveys

Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Normalized
Composite PMI 51.6 51.5 51.8 52.2 51.5 51.9 50.4 -0.6
Services PMI 53.3 52.8 52.9 53.6 53.2 53.5 52.0 -0.3
Manufacturing PMI 47.5 47.9 47.7 47.6 46.5 47.0 45.6 -1.3
Construction PMI 52.2 52.1 50.6 50.8 50.6 49.1 - -

Source: Markit.


Monetary Policy Action by the ECB on September 12, 2019


*ECB LOWERS DEPOSIT FACILITY RATE TO -0.5%

*ECB TO BUY EU20b OF DEBT/MONTH FROM NOV. 1

Source: Bloomberg.


Volatility in the markets has picked up over the last year and will likely remain elevated. Slower growth and increased volatility will be key themes going forward. 

bmo-etfs_02chart848px_2019-10-01_ENG.jpg#asset:3287

Outlook
Adding to international markets will protect investors from Canadian idiosyncratic risk. As global equity markets are vulnerable to slower growth and increased volatility, implementing a defensive strategy to gain exposure to international markets may protect returns going forward. 

Natalia Moreno

Defensive Diversification in Late Cycle Markets

Snapshot
As we move into the latter stages of an extended business cycle, global growth has continued to slow down. Some countries have fared better than others with those more dependent on trade being hit the hardest.

Investors looking to defend against potential late cycle volatility should consider investing in BMO low-volatility ETF strategies. When investing specifically in international markets, investors can access BMO Low Volatility International Equity ETF Hedged to CAD (ticker: ZLD).

Details
BMO Low Volatility International Equity ETF Hedged to CAD (Ticker: ZLD)

Benefits
As a late cycle brings more volatility, investors become wary of equity markets. To stay invested and control broad market risk (beta), investors may look to defensive strategies. ZLD provides investors with the opportunity to access international markets defensively.

Trade Idea
ZLD is exposed to equities across developed markets (EAFE) countries in defensive sectors, including Consumer Staples, Real Estate and Utilities. The Fund’s geographic and sector exposures complement an equity portfolio composed primarily of S&P TSX stocks.

Sector Comparison (%) of ZLD vs. S&P TSX

ZLD S&P TSX Diff
Communication Services 9.78 5.64 4.15
Consumer Discretionary 9.73 4.26 5.47
Consumer Staples 12.57 4.09 8.48
Energy 1.14 16.54 -15.39
Financials 5.19 31.78 -26.59
Health Care 9.42 1.56 7.86
Industrials 16.67 11.17 5.50
Information Technology 2.10 5.43 -3.33
Materials 3.28 11.39 -8.11
Real Estate 15.03 3.58 11.46
Utilities 14.67 4.55 10.44

Source: Bloomberg, as of September 23, 2019.

When comparing ZLD to the broad market index (MSCI EAFE Hedge to CAD Index), ZLD has outperformed the index during periods of market volatility and fallen behind in upward trending markets. This is because ZLD invests in securities with low beta (broad market risk exposure) that outperform when volatility picks up.

Oct-2019-graph-a.jpg#asset:3359

EAFE countries have been bruised by slower growth out of China, trade tensions between the U.S., and China and Brexit uncertainty. As these issues continue to put pressure on markets, central bank accommodation should provide some stimulus to EAFE economies and support to equity markets indirectly.

Eurozone PMI Showing Worrisome Signs
EURO AREA - headline readings from the latest PMI surveys

Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Normalized
Composite PMI 51.6 51.5 51.8 52.2 51.5 51.9 50.4 -0.6
Services PMI 53.3 52.8 52.9 53.6 53.2 53.5 52.0 -0.3
Manufacturing PMI 47.5 47.9 47.7 47.6 46.5 47.0 45.6 -1.3
Construction PMI 52.2 52.1 50.6 50.8 50.6 49.1 - -

Source: Markit.


Monetary Policy Action by the ECB on September 12, 2019


*ECB LOWERS DEPOSIT FACILITY RATE TO -0.5%

*ECB TO BUY EU20b OF DEBT/MONTH FROM NOV. 1

Source: Bloomberg.


Volatility in the markets has picked up over the last year and will likely remain elevated. Slower growth and increased volatility will be key themes going forward. 

bmo-etfs_02chart848px_2019-10-01_ENG.jpg#asset:3287

Outlook
Adding to international markets will protect investors from Canadian idiosyncratic risk. As global equity markets are vulnerable to slower growth and increased volatility, implementing a defensive strategy to gain exposure to international markets may protect returns going forward.