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Panic-driven declines in overseas markets dragged down cross-border ETFs.

On August 5, affected by the sharp drop in the external stock market, cross-border ETFs fell across the board. During the trading session, 6 cross-border ETFs, including Nikkei 225ETF (513880), Nasdaq Technology ETF (159509), and Japan Topix Index ETF (513800), once hit the limit down. As of the close, Nikkei 225ETF and Nasdaq Technology ETF were still at the limit down state. In addition, more than 30 cross-border ETFs fell by more than 5% in a single day.

Recently, the prices of major asset classes in the global market have fluctuated greatly. Due to the interweaving of multiple factors, the annual returns of cross-border ETFs have continued to shrink, and the returns of some products have even turned from positive to negative.

Cross-border ETFs fell across the board

On August 5, following the correction of European and American stock markets last Friday, Asian stock markets continued their downward trend, with the Japanese stock market "leading" the plunge. As of the close, the Nikkei 225 index fell 12.4% in a single day, the Indian SENSEX30 index fell 2.74%, the Korean KOSDAQ index fell 11.3%, and the Vietnamese Ho Chi Minh Index fell 3.92%.

Cross-border ETFs that track overseas markets all fell back. On August 5, six cross-border ETFs, including the Nikkei 225 ETF, the Nasdaq Technology ETF, and the Japan Topix Index ETF, once hit their limit down.

As of the closing, the Nikkei 225 ETF and the Nasdaq Technology ETF were still at the limit down. In addition, more than 30 cross-border ETFs fell by more than 5% in a single day, involving various overseas markets such as Saudi Arabia, South Korea, Germany, and France.

Since the beginning of this year, the performance of A-shares and Hong Kong stocks has been under pressure, while QDII products deployed in overseas markets have achieved good results. In the first half of the year, the Nasdaq Technology ETF became the champion fund in the first half of the year with a return rate of 33.71%, and the Jianxin Emerging Markets Hybrid (QDII) Fund ranked second.

For a long time, the fund performance ranking has been in a situation where the west wind (QDII funds) overwhelms the east wind (A-share funds).

For cross-border ETFs traded on the exchange, active funds even ignore the high premiums and continue to pour into related cross-border ETFs, pushing up the premium rate of cross-border ETFs. For example, the premium rates of Asia Pacific Select ETF and Nasdaq Technology ETF are as high as 20%, and many cross-border products tracking the US and Japanese stock markets have had premium rates of more than 5% for many consecutive days.

After this round of decline, the returns of cross-border ETFs have shrunk significantly this year. The highest return is still the Nasdaq Technology ETF, which has a positive return of 23.2% since the beginning of the year. The returns of some cross-border ETFs tracking the Nasdaq index have shrunk from the highest 27% to less than 5% this year. The performance of cross-border ETFs tracking the French and Japanese markets has turned from rising to falling this year.

At present, the attitude of funds towards cross-border ETFs has undergone an extreme reversal, becoming more cautious, and some funds have chosen to leave the market. The enthusiasm of funds to participate in cross-border ETF investment has faded, further exacerbating the recent sluggish performance of cross-border ETFs, and the premium rate of related ETFs has narrowed significantly or even appeared at a discount. This has also become an important reason why some cross-border ETFs have fallen more than the benchmark index in a single day.

At present, the phenomenon of large premiums of cross-border ETFs has been alleviated, and there is only one cross-border ETF product with a premium rate of more than 5%. Affected by the time difference of net value settlement, some cross-border ETFs even have discounts, such as the Nasdaq 100 Index ETF, which has a discount rate of more than 5%.

Expectations of a global capital market recession

Recently, prices of major asset classes in global markets have fluctuated significantly, with multiple factors intertwined.

It is worth noting that on August 2, the CBOE Volatility Index VIX, which is believed to reflect market panic, soared 25.82%. The index point reached 23.39, the highest level since March 2023.

The main reason behind this is that the US economic and labor data for July were released one after another, and the poor performance of the data triggered a series of pessimistic expectations. The 10-year US Treasury yield recorded its largest weekly drop since March 2020, and investors sold stocks and turned to buying safer assets such as government bonds.

In addition, the financial reports of some technology companies fell short of expectations, and the Nasdaq index, which is dominated by technology stocks, continued to fall. Last weekend, Buffett's Berkshire Hathaway released its second-quarter financial report and significantly reduced its holdings in Apple. The stock god's operations made investors more worried about the subsequent economic growth of the United States, and believed that Buffett was reducing his holdings to avoid risks.

A series of events combined in a short period of time exacerbated market volatility.

Bosera Fund analyzed that the market's concerns about the US economic recession have intensified, and the US stock market has begun to trade in recession expectations. In the short term, in the absence of relevant data to falsify the recession trade, global stock markets have been affected to a certain extent.

"The current market expectations for a US recession have increased, and the 10-year US Treasury yield, which was relatively stable, has also begun to accelerate downward in the past two days." Huabao Fund's International Business Department believes that the US economy is currently in the process of returning to normal and has not reached the level of recession. The US GDP grew by 2.8% in the second quarter, and the current forecast for the third quarter is still around 2%, which is far from a recession. Even if growth slows further, if the degree is not severe, it may still be possible to boost demand again through normal interest rate cuts. For risky assets, there will be no systemic pressure, and they may gradually turn to the logic of improving the denominator in the future, that is, they can be bought back if they fall too much.

At the beginning of August 5, pessimism spread to the Asian market. The adjustment of the Japanese and Korean stock markets was surprising. He Siyao, QDII multi-asset investment manager of HSBC Jinxin Fund, concluded that from the perspective of monetary policy, since the US inflation cooled down beyond expectations in mid-July, the Fed's interest rate cut transaction has been launched; in addition, the yen carry trade, which was relatively hot this year, also began to loosen at the end of July. At that time, the yen had already begun to appreciate significantly, and Japanese stocks also showed a state of high volatility and decline. On July 31, the Bank of Japan raised interest rates and its attitude was hawkish, and the carry trade liquidation continued. The overall market sentiment was weak during this period; in addition, the financial reports including those of the US stock market were disclosed very intensively in the past two weeks, and the performance of technology giants did not bring new surprises to the market. On Friday night, the US non-farm employment data was lower than expected, and there was uncertainty in the situation in the Middle East. In summary, the intensive emergence of factors triggered a sharp rise in market risk aversion, and the interest rate cut transaction also quickly transitioned to a recession transaction.

Institution: US stocks may be over-traded and in recession

As the best performing ETF in the market in the past two years, cross-border ETFs have naturally attracted a large amount of capital inflows and attracted much attention from the market. Their future performance is what investors are most concerned about.

"At present, the market fluctuations have not yet triggered extreme situations such as liquidity crisis." He Siyao said that the next focus will be on whether the factors driving the market can be gradually digested and gradually stabilized. In the absence of clear information, it is a reasonable strategy to appropriately hedge overseas risky assets.

"After the big gains this year, short-term fluctuations are inevitable." Huabao Fund's International Business Department continues to be optimistic about the medium- and long-term development potential of AI. Short-term stock price fluctuations have not affected the long-term technological revolution. Among the technology companies that have disclosed their financial reports, Microsoft, Meta, Amazon and other companies have expressed optimism about their investment in AI in their quarterly reports. The management said that the risk of not investing at this stage is greater than the risk of over-investment. Therefore, the valuations of Nvidia and TSMC are expected to be repaired in the future. Huabao Fund pointed out that if the Federal Reserve chooses a relatively mild interest rate cut model in the future, the valuation of US stocks can be well supported.

"For the US economy, it is difficult to determine the economic recession based on employment data alone." Bosera Fund analyzed that the July data may be low due to hurricane disturbances, and the practicality of the Sam rule has decreased in this cycle. The unexpected rise in unemployment is also due to population growth and the return of non-labor force rather than layoffs. From a positive and optimistic point of view, among the 75% of S&P 500 components that have announced Q2 financial reports, 74% of them have exceeded expectations, and the economy is still resilient. At present, the US stock market may have over-traded in recession, and a sharp correction may also be considered as an opportunity to re-enter.

Editor: Tactical Heng

Proofreading: Zhao Yan

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