What Works in Equity Markets
QE, GDP Growth and the Value Conundrum
* Value = Key Macro Risk Diversifier — Of all our style composites, only Value appears to offer any diversification at present from a macro risk perspective.
* QE + Nominal GDP Growth Put = Good for Value — Historically, Value offers statistically significant average returns in excess of 1% when the street increases its year-on-year GDP growth forecast.
* Cheap != Cheap — Value does not look attractive on valuations. Relative to the benchmark, not only are cheap stocks trading around all-time highs, but expensive stocks are also trading around all-time lows.
* Value = Cyclical + Financials vs. Defensives — In the absence of sector neutrality, to be long Value at this point means essentially taking significant cyclical bias on Financials and Energy. Risk remains highly levered to Financials
* QE + De-Equitisation = Good for Value; but Prefer Defensive (Income) Over Cyclical — Our strategists suggest QE should benefit de-equitisers. This should in turn be a tailwind for Dividend Yield and companies returning capital to
shareholders.
* Stock Screen: Defensive Value & Quality at a Reasonable Price — We present a screen looking for potentially undervalued stocks in our High Quality portfolio and overlay this with defensive Value (income). 10 stocks pass the screen. Large Caps include: Snam, SEB, Next, WPP, Red Electrica.