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Global Policy Easing Cycle Set in Motion: ETFs to Win

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Amid global growth concerns sparked by unceasing trade tensions, a rate cut cycle is in motion for many economies. Recently, central banks in South Korea, Indonesia and South Africa resorted to rate cuts in order to keep signs of a slowdown at bay. Notably, top Asian exporters like Singapore, Japan and South Korea have been experiencing low exports amid trade tensions.

Inside the Series of Rate Cut Announcements

On Jul 18, the Bank of Korea (BOK) cut the seven-day repurchase rate to 1.5% from 1.75%, marking their first rate cut since 2016. The move was forecast by only 10 of 25 analysts surveyed by Bloomberg. The BOK now expects the economy to expand 2.2% this year, versus 2.5% in April. Inflation is projected to tick up to 0.7% versus the prior projection of 1.1%. The central bank signaled at more rate cuts.

On the same day, Bank Indonesia reduced its key interest rate by 25 bps to 5.75%. Lending and deposit facility rates were also cut by 25 bps to 6.5% and 5%, respectively. The move signaled an end to the tightening cycle that started last year (read: Indonesia Banks on Back-to-Back Rate Hikes: ETFs in Focus).

On Jul 18, South African Reserve Bank (SARB) also slashed interest rates for the first time since March 2018 by 25 bps to 6.5%, as expected. Inflation expectations continued to moderate in the economy.

A number of other countries have slashed rates since April. The central bank of Philippines cut its key overnight reverse repurchase facility rate by 25 bps to 4.5% on its May 5, 2019 meeting. It was the first rate cut since May 2016, reversing a 175-bp rate hike last year. With the economy seeing the weakest quarterly growth rate in the first quarter of this year since third-quarter 2014, there are chances that the central bank would go for more rate cuts, should the need be (read: Philippines ETF Rebounds: Can the Rally Continue?).

New Zealand’s central bank slashed interest rates to a fresh record low in early May and hinted at more policy easing, should the need be. It became the first developed economy to ease policy this cycle, per Bloomberg.

The Reserve Bank of India lowered its policy rate by 25 bps to 5.75% during its June meeting. India slashed rates in every meeting this year, enacting a total cut of 75 bps.

In May, China’s central bank announced a cut in reserve requirement ratios (RRRs) to release about 280 billion yuan ($41 billion) for some small and medium-sized banks. The PBOC had set three dates — May 15, Jun 17 and Jul 15 — for the implementation of a cut in RRR.

Fed & ECB Dovish Too

The Fed has indicated that it is ready to cut rates this year if required. This was against multiple rate hikes the Fed had enacted last year. Stubbornly-low PCE inflation probably led to such statements (read: ETF Strategies to Follow If Fed Cuts Rate).

The ECB indicated on Jun 18 that it could restart money printing to boost its ailing economy, even though it had ended QE in 2018 (read: ECB Considers Further Stimulus: ETFs to Top & Flop). 

ETFs to Win

Vanguard International Dividend Appreciation Index Fund (VIGI - Free Report)

Since global growth slowdown is causing policy easing, a quality ETF like VIGI should be a good option. The underlying Nasdaq International Dividend Achievers Select Index focuses on high-quality companies in developed and emerging markets, excluding the United States, that have both the ability and commitment to boost dividends over time. It charges 25 bps in fees (read: 5 Market-Beating Dividend ETFs of 1H).

JPMorgan USD Emerging Markets Sovereign Bond ETF (JPMB - Free Report)

Host of rate cuts in emerging markets should bode well for bonds of related regions. The fund comprises liquid, U.S. dollar-denominated sovereign and quasi-sovereign fixed and floating rate debt securities from emerging markets selected using a rules-based methodology. The fund yields 4.65% annually.

iShares Global Consumer Staples ETF (KXI - Free Report)

Since the consumer staples sector performs well in a low-rate environment, the fund should gain in the days ahead. Also, consumer staple is a slowdown-proof industry. This global consumer staples fund is heavy on the U.S. (51.2%), followed by 11.4% focus on U.K., 9.5% on Switzerland and 6.8% on Japan. The fund yields 2.42% annually.

iShares Edge MSCI Minimum Volatility EAFE ETF (EFAV - Free Report)

The present situation might prove beneficial for low-volatility stocks. EFAV looks to replicate the performance of international equity securities that have lower absolute volatility. No single stock makes up for more than 1.52% of the portfolio. Country-wise, the fund appears more focused on Japan (28.4%), Switzerland (13.4%) and United Kingdom (11.8%) equities. The fund charges 20 bps in fees (read: Time to Buy Global Low-Volatility ETFs?).

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