"Chart of the Month" by HQ Trust: Who is currently investing in gold - and who is selling?
It rises and rises and rises: The price of gold has been rising steadily for many months. Who is responsible for this: Investors? Central banks? The jewelry industry? Shijiao You has analyzed who is driving up the price of the precious metal with their purchases – and who is currently selling gold.
The analyst from HQ Trust’s Strategic Asset Allocation division looked at net gold investments in bars and coins, ETFs and similar products, the purchases and sales of global central banks – but also the proportion that is in demand from the jewellery industry and the technology sector. Shijiao You’s analysis starts in the first quarter of 2010 and ends in March 2024, using the net investments in gold per quarter and the average gold price in dollars in the corresponding months.
Looking at the development of gold demand from 2010 to the end of the first quarter of 2024, Shijiao You says:
“On average, gold demand has increased by 6.5% per year over the past 14 years. The gold price in dollars increased by 5% per year over the same period.”
“Demand from the jewelry and technology sectors has declined slightly in relative terms over this period but is still around 50%.”
“The share of gold investments is now only around 16%. In the first quarter of 2010, it was still 27%.”
“In contrast, net purchases by central banks have grown strongly. The share of demand here has almost quadrupled to 23%.”
This is how Shijiao You assesses the latest developments:
“The world’s central banks have recently bought significantly more gold. Their investments are at their highest level since the beginning of the observation period.”
“According to data from the World Gold Council (WGC), Russia, China, India and Turkey in particular have significantly increased their gold reserves in recent decades.”
“Overall net inflows into bars and coins have also reached a new ten-year high. It is striking that net purchases of bars and coins in China have recently increased significantly.”
“Investments in ETFs and similar products developed very dynamically during the analysis period. However, since Q4/2020 – with the exception of Q1/2022 – only net outflows have been observed in ETFs overall.”
“According to the WGC data, ETF net purchases in this period came predominantly from Asian countries, while net outflows were almost exclusively from North America and Europe.”
"Chart of the Month" by HQ Trust: The best time to buy shares
Right at the beginning of the month? In the middle? At the end of the month? Or does it not matter in the long term on which day investors buy shares or have their savings plan executed? Pascal Kielkopf did the maths and came to a clear conclusion.
The capital market analyst from HQ Trust analysed the average daily returns of equity indices such as the MSCI ACWI, the German benchmark index DAX and the US S&P 500 index. As the same pattern could be observed for these stock market barometers, the presentation is limited to the market-wide, global equity index MSCI ACWI. Pascal Kielkopf’s analysis covers the period from January 1972 to May 2024.
– ‘On average, the MSCI ACWI has risen by 0.8% per month since 1972.’
– ‘If you look at an average month, this “model month” consists of three phases.’
– ‘At the beginning of the “sample month”, prices rise. Towards the middle of the month there is a slight downward trend, after which prices rise again.’
Pascal Kielkopf offers a possible explanation for the weakness shortly after the middle of the month:
– ‘Most important economic data such as inflation or unemployment figures are published in the first and last days of a month. This also applies to many company figures.’
– ‘The period shortly after the middle of the month, on the other hand, is usually somewhat less news-rich, which could be used by investors to take profits.’
– ‘This is also when the futures markets regularly expire. Shortly after the so-called ‘Triple Witching Day‘, many traders adjust their positions, which often leads to increased volatility.’
What should investors do?
– ‘In theory, an investor who was always invested from the 25th of a month to the 18th of the following month would have done best.’
– ‘On average, his return would have been 0.9 % per month. What sounds like a marginal difference would have made a significant difference in the long term.’
– ‘However, investors should not forget transaction costs and taxes in this analysis – and above all the fact that it is only a sample month and all periods are different in reality.’
– ‘Investors should therefore execute their savings plans when the money is available. For example, shortly after they have received their salary or pension. Regardless of whether this is the beginning, middle or end of the month.’
– ‘Waiting several days or weeks before doing so will cost more in returns than it brings – and such timing also contradicts the long-term nature of a savings plan.’
"Chart of the Month" by HQ Trust: Why rebalancing is so important
When diversifying their investments, many investors rely on the so-called 60/40 portfolio, in which 60% of assets are invested in equities and 40% in bonds. As their prices move differently, the respective ratios naturally also change. Pascal Kielkopf has analysed whether it makes sense to regularly return to the starting ratios.
The capital market analyst from HQ Trust calculated the performance of two investors, one of whom rebalances his portfolio annually and returns to the 60/40 ratio. The other, on the other hand, relies on Kostolany’s sleeping pills and simply lets things take their course. Pascal Kielkopf used the global indices MSCI ACWI and the Bloomberg Global Aggregate for bonds to calculate the return and the equity and bond ratios. His analysis covers the period from the beginning of 2000 to April 2024.
– “At first glance, the differences in performance are not that great, but they are all the greater when looking at the equity and bond ratios.”
– “The investor who rebalances annually achieved growth of 4.7 % per year. 100,000 euros would have become 306,000 euros.”
– “For the investor who did not change his quotas, the annual increase was 4.3 %. In this case, the 100,000 euros would have become 280,000 euros.”
– “However, the differences in the risk content of the portfolio were all the greater: without rebalancing, the equity ratio fluctuated between 32 and 70 per cent. With annual adjustment, the ratio also fluctuated during the year, but the interval between 46 and 66 per cent was significantly smaller.”
– “Whether equities or bonds ultimately achieved the slightly better return in this analysis depends on the period of the calculation and is not so relevant: Investors should rather make sure that their risk budgets are not massively overshot or undershot.”
With regard to a sufficient diversification of assets, Pascal Kielkopf says.
– “In principle, a portfolio with 2 asset classes is of course better than a portfolio that only focuses on equities or bonds. However, we recommend much broader diversification.”
– “When investing in several asset classes, regular rebalancing is even more important, otherwise the portfolio could become overly dominated by the asset classes that have performed well over time.”
Would more frequent rebalancing have brought additional benefits?
– “With regular rebalancing, whether quarterly or monthly, the investment ratios stick closely to the initial targets.”
– “However, allowing the investment ratios to “breathe” during the year has even had a positive effect on performance in the past.”
– “Even in view of the significantly higher fees, more frequent rebalancing would not have been worthwhile.”
"Chart of the Month" from HQ Trust: What credit spreads tell us about the attractiveness of corporate bonds
As they generally have a higher default risk than governments, companies have to offer more interest on their bonds. However, Pascal Kielkopf took a closer look at the fact that this risk premium can vary greatly over time – and what this means for investors’ return expectations.
The capital market analyst from HQ Trust first examined the credit spread of the Bloomberg Global Corporate Bond Index. This shows the premium that issuers of corporate bonds have to pay compared to government bonds.
– “Since 2000, the premium that issuers of corporate bonds have had to offer investors has averaged around 1.4%.”
– “However, there are big differences: when the capital markets are calm, the spread is well below one percent.”
– “In crises, on the other hand, it shoots up. Then confidence falls and issuers have to offer significantly more to place their bonds. During the financial crisis, this spread was sometimes more than 5 %.”
– “The spread is currently 1.1 %. Investors can therefore only expect a small additional return from corporate bonds compared to government bonds.”
However, credit spreads do not say much about the additional income realized. The analyst calculated how these turned out over one-year periods, taking into account the level of credit spreads. The analysis covers the period from October 2000 to February 2024.
– “Over the entire period, the average premium that investors were able to earn with corporate bonds was 0.7% p.a.”
– “As a general rule, the higher the spread, the higher the realized returns.”
– “As there can be significant deviations in both directions, especially with high spreads, a broad diversification across government and corporate bonds is advisable.”
And where does the relatively large difference between the excess returns expected in the credit spreads and the one-year returns actually realized come from?
– “The spread doesn’t just refer to one year, but to the entire remaining term of the bonds. This is currently 6 years on average.”
– “If the spread falls, this means that the prices of corporate bonds rise. Conversely, an increase in the spread leads to a fall in prices.”
– “The realized return therefore depends not only on the spread, but also on how it changes over time.”
"Chart of the Month" From HQ Trust: The free riders of the Magnificent 7
Many investors are probably sick of hearing that the shares of the Magnificent 7 have had a great run in recent months. But which stocks have actually benefited from the tech boom in their shadow? And who performed in the opposite direction? Pascal Kielkopf took a conscious look at the second row – and the other end of the spectrum.
The capital market analyst from HQ Trust calculated the weekly returns of the Bloomberg Magnificent 7 Index, which contains the shares of Apple, Nvidia, Alphabet, Meta, Amazon, Tesla and Microsoft equally weighted – as well as the returns of all other shares in the S&P 500 – for the period from the beginning of January 2023 to the end of January 2024. He then determined the respective correlations.
– “Unsurprisingly, it is mainly technology stocks that are closely linked to the performance of the Big 7.”
– “19 of the 20 stocks with the highest correlation to the Magnificent 7 are from the semiconductor or software segment.
– “The only exception in the top 20 is lithium producer Albemarle.”
At the bottom of the table, among the stocks with the most negative correlation to the Magnificent 7, there are far more sectors:
– “The 20 stocks that have moved most strongly in the opposite direction to the Magnificent 7 come from 6 different industry groups.”
– “However, the 6 companies with the highest negative correlation include 5 insurance companies: Hartford, Allstate, Chubb, Travelers and Globe Life.”
– “The top 20 include a number of well-known companies, such as brand giants Johnson & Johnson and Colgate-Palmolive, oil giant Exxon Mobil and Warren Buffett’s Berkshire Hathaway.”
However, some companies also developed differently to the majority of their sector:
– “Within the technology sector, there are also companies with a negative correlation to the Magnificent 7: especially traditional companies such as IBM, Motorola or HP.”
– “There are also free riders in the financial sector, such as Coinbase, MSCI and Moody’s.”
"Chart of the Month" From HQ Trust: Private equity - The mounting pressure to sell
Over the past year, a clear trend has emerged: private equity managers are holding onto their investments for longer. The average holding period of US-based private equity owned companies exceeded 3 years for the first time in a decade.
Benedikt Pfeuffer, Co-Head of Private Equity at HQ Trust, provides insight into the underlying causes of this development and offers his view of what the future holds. In his analysis Benedikt Pfeuffer pays particular attention to the median holding period, as well as the proportion of shareholdings that have been in private equity ownership for more than five years and hence exceed the typical private equity investment duration.
Commenting on the current situation, Benedikt Pfeuffer says:
- “The median holding period of portfolio companies held by US-buyout funds has increased by 6 months, reaching a total holding duration of 3.3 years.”
- “The proportion of companies which have been held by private equity managers for more than five years has increased to 31% – reaching a 10-year high.”
- “Pricing disparity between buyers and sellers, loan underwriting hesitance from banks as well as high cost of capital, contributed to 2023 transaction volumes lagging behind record-breaking deal-making in 2021 and 2022.”
- “Although private equity managers benefit from comparatively lower acquisition prices in the current environment, they are not prepared to sell at these prices.”
Will the situation change over the course of the coming year?
- “The expected interest rate cuts and the associated valuation increases suggest a rebound of M&A transaction volume in 2024.”
- “In addition, we are seeing early signs from US-banks that their willingness to provide financing is growing again.”
- “Meanwhile, managers are coming under increasing pressure to sell their portfolio companies: investors continue to express their clear preference for liquidity and realisation of returns.”
Will Private Equity remain an attractive investment opportunity?
- “Subject to the selection of good managers, we expect private equity to continue to generate attractive returns in the long term.”
- “At HQ Trust, we rely on experienced managers who focus on implementing operational value enhancement strategies that are less dependent on the state of capital markets (financing and valuation levels) for generating returns.”
- “Current examples of this are buy-and-build strategies (buying a platform company and acquiring further smaller companies which complement the platform), corporate carve-outs (spinning out divisions from major corporations) or organic growth by internationalising companies.”
Private equity: the mounting pressure to sell
"Chart of the Month" from HQ Trust: The big difference between small-cap indices
Of course, a balanced portfolio should also include the shares of smaller companies. In the long term, small caps, in which US stocks also account for the largest weighting, have ultimately outperformed large corporations in terms of returns. An analysis by Pascal Kielkopf shows which US small cap index is the better one.
In his new study, the capital market analyst from HQ Trust compares the performance of the well-known US small-cap indices Russell 2000 and the S&P 600 since 2001. It is immediately apparent that the performance of the S&P 600 differs significantly from that of the Russell 2000. This is due to significant differences in the index construction and consequently also in its composition:
- "The S&P 600 places more emphasis on quality. Before a company is included in the index, it must have achieved positive earnings for 4 consecutive quarters. There is no such earnings screening in the Russell 2000."
- "There is also a difference in the frequency of index adjustments. While the Russell 2000 is only reviewed once a year, the S&P 600 is reviewed quarterly."
- "The Russell 2000 is more broadly diversified: as the name suggests, the index is made up of 2000 companies. The S&P only has 600 stocks."
Pascal Kielkopf's look at the long-term returns of the two indices and the characteristics of the four important factors of value, growth, quality and volatility compared to an investment in the broad market shows just how significant these differences are.
- "Since 2001, the S&P 600 has achieved an average return of 8.4%. The Russell 2000 lags far behind at 6.9%."
- "These one and a half percentage points make a big difference in the long term. 100 dollars would have turned into around 642 for the S&P, but only 461 for the Russell."
A look at the individual factors shows where these differences come from.
- "Basically, the factors move in the same direction: Small-cap indices have a stronger value bias and a correspondingly weaker growth bias. In terms of volatility and quality, they lag behind the broad market."
- "However, the differences are also immediately apparent when screening earnings: The Russell is significantly behind the S&P in terms of quality, which means its volatility is also higher."
- "As the Russell also contains many (still) unprofitable growth companies, its value orientation is significantly lower - the S&P, on the other hand, contains fewer growth stocks."
“Chart of the Month” from HQ Trust: Equities - Where the little ones have beaten the big ones
Big beats small: the past few years can be quickly summarized from an investor's point of view. On average, shares with a high market capitalization were more in demand than small caps. However, if you take a look at the individual sectors with Pascal Kielkopf, you might be surprised at how often the small stocks outperformed the large ones.
The capital market analyst from HQ Trust examined the returns of the 11 sectoral MSCI ACWI small and large cap indices. Small caps are often less diversified in their business activities and are more dependent on the success of a few products or services, but when they are successful they also grow much faster. As a result, they are also more exposed to economic fluctuations.
In order to compensate them for the risk they take on, investors therefore expect a higher return from them. Small caps have clearly outperformed over the last 100 years. And what about the past few years?
- "Over the past 10 years, small-cap stocks have not outperformed the broad global equity market."
- "However, this cannot be explained by the fact that small caps have performed poorly: since June 2010, they have achieved a gain of 188% or 7.8% per year."
- "However, large caps were able to gain even more, mainly due to the enormous growth of big tech stocks. They achieved growth of 218 % or 8.6 % p.a."
However, if you look one level deeper, industry-specific trends play the decisive role - and the picture of small versus large sometimes looks very different:
- "Although large stocks were ahead overall, small caps outperformed in 6 out of 11 industries since 2010."
- "Utilities stood out in particular: In a wave of consolidation, many smaller utilities were taken over in the last decade, from which their shares benefited greatly."
- "But small stocks also performed better in the materials, industrials, consumer staples, communications and consumer discretionary sectors."
- "Small energy stocks, on the other hand, lagged the furthest behind: small companies suffered significantly more from the long period of low energy prices. Since these have risen again since 2020, small companies have also been able to catch up."
Written by Pascal Kielkopf, Capital Market Analyst at HQ Trust
