Though the S&P 500 fell 3.29%, MoneyOwl’s 100% equity portfolio was relatively resilient. Our investment team investigates single-stock ETFs and cautions against jumping into them.

(29 August 2022 – 2 September 2022)

Global stock indexes fell around 3% to 4% last week, marking the third weekly setback in a row. The  S&P 500 fell 3.29% and the MSCI World fell 3.32%, MoneyOwl’s 100% equity portfolio was relatively resilient, falling by 2.85%.

In Fixed Income, the Bloomberg Barclays Global Aggregate bond index fell 1.62% after the US 10-year treasury yield rose 16bps to 3.20% over the week. The growing expectations for further sharp interest-rate hikes by the Federal Reserve is weighing on the prices of the US government bonds.

Last week’s highlight was the consistency in labour market data coming out from the US. The latest jobs report highlighted that the US labour market didn’t generate new jobs in August at the same rapid pace as it did in July, but the latest reading of 315K new jobs added was slightly above most economists’ expectations. Additionally, the unemployment rate rose to 3.7% from 3.5%, and the increase in unemployment stemmed in part from a rise in Americans entering the labour force by seeking employment.

A few hours before the previous trading week ended, global equities had a sharp decline, especially in the European region. Risk sentiment was hurt after Russian company Gazprom made a last-minute decision to keep the crucial Nord Stream pipeline shut, worsening the prospects of energy woes in Europe.

A Primer On Single-Stock ETFs

There is a recent wave of ETF issuers rolling out single-stock ETFs. At a time when the market is experiencing wild swings and recession risks are growing, single-stock ETFs have the potential to entice amateur investors into speculative trades as the product uses derivatives to deliver, for instance, 1.5 or 2 times the performance of a company each trading day.

While the novelty here is the focus on single stocks, leverage brings the meat of the story. Leverage magnifies returns, which in turn amplifies volatility. A simple example highlights how this could impact an investor’s experience. Suppose you bought $100 of your favourite stock. If it declines by 10% that day and then rebounds by 10% the next, your investment drops to $90 the first day and ends up at $99 the second. Now suppose you had doubled your exposure via leverage. The same 10% decline and rebound in the stock would drop your investment to $80 before bringing it back up to $96. The 2x exposure didn’t merely double but rather quadrupled your loss.

It’s one thing to amplify broad-market-level volatility; it’s another thing to amplify single-stock volatility. Historically, the average annualized median monthly standard deviation of individual US stocks is around 38% historically, which is about double the S&P 500’s historical level of volatility at 19%. A one-standard-deviation decline of 38% would translate to a 76% loss at 2x leverage.

Single-stock ETFs eschew a fundamental investment principle—diversification. Throughout the history of capitalism, experience has shown that investors cannot reliably predict which stocks will outperform the market. The best that can be said about single-stock ETFs is that they allow people to pick stocks with borrowed money without the hassle of a margin account and that they limit losses to the amount invested. But those features could pave the way to more heartache. Picking individual stocks is notoriously difficult. Adding leverage just magnifies the losses.

Staking outsize positions on individual stocks could mean neglecting to capture the equity, small-cap, value, and high-profitability factors, missing out on top-performing equities as they emerge, and failing to fully take advantage of the benefits of diversification. Most retail investors should probably not touch these things with a ten-foot pole.

Earnings Scorecard

Companies in the S&P 500 posted an average second-quarter earnings gain of 6% over the same quarter a year earlier, according to FactSet data from the recently concluded earnings season. That result marked the slowest growth rate since the fourth quarter of 2020. For the second quarter in a row, energy was the strongest among all 11 sectors, with earnings growth of 293% in the latest quarter.

Currency divergence

Japan’s yen was trading at around 140 to the US dollar on Friday, its lowest level since 1998. The yen’s value relative to the dollar has fallen around 18% year to date, in part reflecting expectations of higher interest rates in the United States and Japan’s continued embrace of a low-rate policy.

China Lockdown Ripples

China extended its lockdown in some districts of western megacity Chengdu and ordered more mass testing, further demonstrating its commitment to stamping out Covid Zero despite huge economic losses. As growth sputters in the world’s second-biggest economy, its currency has tumbled to a two-year low and looks set for further losses.

Europe’s Inflation and Energy Crisis

Economic data coming out last week shows that Euro-area inflation accelerated to another all-time high, strengthening the case for the European Central Bank to consider a jumbo interest-rate hike when it meets next week.

Last Friday, Europe’s energy crisis moved from background to foreground as Russian Company Gazprom made a last-minute decision to keep shut the crucial Nord Stream pipeline, rather than reopen it after maintenance as scheduled. The European economy relies on Russia for more than half of its gas and about a third of its oil. Despite Europe’s politicians recently unveiling a $280 billion euros package to protect consumers, energy rationing this winter seems certain to add to the continent’s economic woes.

Chinese Drone Shot Down

The tension between China and Taiwan remains as Taiwan shot down civilian drones thought to be from China that were buzzing its islands close to the mainland. In a clear sign that Taipei is pushing back against efforts to encroach on its territory. Taiwanese troops brought the machine down near Kinmen Island after attempts to repel it failed, according to the garrison on the outpost. Meanwhile, the founder of Taiwanese chipmaker United Microelectronics outlined plans to fund military training for millions of “civilian warriors” in Taiwan to repel any potential Chinese invasion.

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