Same Planet Different Worlds

Investors were so captivated by market dramas unfolding on opposite ends of the globe that even a three hour trade halt on the NYSE could barely tear their attention away from their Bloomberg terminals.  Thanks to the desperate measures of the Chinese government and the capitulation of the Greek’s, a measure of calm was restored to the markets the second half of the week although volatility is sure to be on everyone’s mind when the markets open Monday morning.  Checking in on the ETFG Quant screeners and fund flows reports, we noticed that last week’s volatility has already engineered a profound shift in the market dynamics with European and Chinese equity funds surging to the top of buy lists although we’re left to wonder which rally has staying power.

Our regular readers know that we at ETFG aren’t averse to taking a victory lap now and again but even we were surprised by how quickly our list of behavioral top scorers was dominated by Europe equity funds offering exposure to some of the most “at-risk” nations within the Eurozone.  Last week we discussed the trend among top-performing European funds of reducing volatility by overweighting the “frost belt” of Swiss, Danish and UK equities and while the possibility of avoiding a Grexit is still a long-shot, you don’t need a chart to know that when the risk is “on”, the last shall be first. German equity funds continue to be well-represented but a major surge in momentum pushed the iShares MSCI Italy Fund (EWI) to the #4 spot when two weeks ago it wasn’t even in the top 100 while the iShares MSCI Spain (EWP) and iShares MSCI Ireland Fund (EIRL) are tied for the 17th position with identical scores although they got there by different routes.  Strong price momentum throughout 2015 keeps Ireland high on our lists even though the fund underperformed broader unhedged European equity funds last week while Spain’s been rocketing to the top thanks to higher volatility and put/call ratio.  But while the funds have been trading well relative to their historical performance, the amount of new capital finding their way to the funds is relatively small with EWI’s asset base increasing a mere .7% last week and only slightly ahead of massive investor favorite, the WisdomTree Europe Hedged Equity Fund (HEDJ), which saw a .6% increase.

A few intrepid investors have been willing to embrace risk by taking on exposure to country-specific fund yet most of the investment masses haven’t found the courage to do more than make $2 bets as they continue to stay with large, currency hedged funds much as they have throughout the year. The iShares MSCI EMU Index (EZU) remains the go-to fund for those seeking unhedged exposure to events in the EU but even with the Euro up nearly 5% since the lows of April 13th, the (HEDJ) continues to hold the top-spot in every 2015 fund flows report with over $14.4 billion in new assets in 2015 which includes a massive $194 million in just the last week to EZU’s paltry $25 million. Investors are understandably nervous with so much on their minds; first the future of the common currency as Greek flirts with disaster and then Chairwoman Yellen reiterates her belief that the U.S. economy is strong enough to withstand a rate hike in 2015, but they could be ignoring the Euro at their own peril.  Since the Euro started gaining ground in April it’s made a series of higher lows (and we’ll admit, lower highs) but the effect of the performance of these two funds is profound.  While HEDJ is off nearly 6.3% from 4/13 through Friday, that marks a major improvement with the fund gaining 4% in the last two days.  But EZU is down .23% and while the volatility for EZU holders is mind-numbing, the performance boost more than made up for it with the fund gaining 7.4% in just 2 days.

But for those who seek out volatility, EZU can’t hold a candle to the #5 fund on our list, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) whose 1.96% return for last week was only made possible by a stunning 27.6% advance on Thursday and Friday.  Like most investment professionals, we make our living by looking for divergences and while two other China funds make the top 10 with the Market Vectors China AMC A-Share ETF (PEK) at #3 and the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (ASHS) coming at #7, they made their way onto our lists by a very different means than the Italian or Spanish funds.  Where those country-specific funds made the list thanks to strong price momentum backed by small inflows, the China A-shares owe their presence largely to what we consider to be “sentiment” related factors such as high short interest or implied volatility.  If you were to use our ETFG Quant tables to reorder the universe of ranked funds based on sentiment scores, 6 of the top 10 funds would be China funds including Hong Kong mainstay the iShares MSCI China ETF (MCHI) whose weak price momentum is more than made up for by almost record high volatility and put/call scores.  The divergences are furthered by the fact that nearly all of the top China funds recorded small outflows for the week as investors debate whether the recent rally by government decree can stand on its own once the suspended half of the market comes back.

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