Broadly speaking, Hamilton Capital Global Bank ETF (HBG; TSX) seeks to invest in banks with higher expected EPS growth, which generally means banks domiciled in the countries with the highest GDP growth rates. Importantly, as we highlighted in our “Key Themes in Global Banking”, we also favour countries with independent central banks, especially those with higher central bank rates, which provides crucial flexibility in monetary policy. Arguably the greatest risk to global banks would be an abrupt slowdown in global GDP. Countries with higher – or more normal – central bank rates give their central banks more flexibility in reducing rates to support domestic growth in GDP.
In the Hamilton Capital Global Bank ETF, the portfolio-weighted average central bank rate is approximately 100 bps, materially higher than Canada (50 bps, with downward pressure) and the U.S. (25-50 bps, likely headed higher). In addition, owing to the ETF’s ~35% allocation to U.S. banks, it is more likely for this portfolio-weighted average to rise, versus decline.
Of relevance, HBG has limited holdings in countries with negative rates.
Australia – of which HBG has ~8% exposure – is a good example of a country where the central bank holds a higher degree of flexibility with respect to monetary policy. Recently, when concerns over growth emerged, the Reserve Bank of Australia reduced its central bank rate from 200 bps to 175 bps.
Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.