What just happened? Separating sectors from factors
Since 10-year Bund yields bottomed on July 8, there has been a clear sector rotation in Europe, with Banks up c.24%, Basic Resources up c.17% and Autos up c.16%. Meanwhile, Healthcare, Utilities and Food and Beverages
are down c.7%, 3% and 2% respectively. In this note, we employ GS sectorneutral IP factors to distinguish between the recent rotation in sectors and that seen in factors. Since July 8, we find that sector-neutral Value is up >5% and Growth is up c.4%. Meanwhile, the Volatility and Size factors have underperformed, in each case reversing the performance trend seen in 1H.
A case study in 10-year Bund yields
In a bid to help investors position from here, we study the historical relationship between European factor performance and 10-year Bund yields. We find that when 10-year Bund yields rise (which our economists
believe is likely from here), there is a significant positive impact on the performance of our IP Value and IP Growth factors and a significant negative impact on the IP Returns, IP Volatility and IP Size factors.
Factors to focus on now
Our economists forecast further upside to 10-year yields on US Treasuries and German Bunds from here. On that basis, our 10-year case study suggests that stocks with High Growth, High Volatility and Low Returns (relative to
sector peers) should outperform. Conversely, stocks with Low Growth, Low Volatility and High Returns look vulnerable. In this context we also note that Low Growth and Low Vol factor ‘tails’ currently trade at stretched valuations.
Identifying ‘Rotation Catch-Up Candidates’
We present a list of 23 ‘Rotation Catch-Up Candidates’, including Buy rated Accor, Colonial, Fresenius Medical Care, Ingenico, Mediaset and Shire. These stocks all screen as having higher growth, higher volatility and lower returns than sector peers. Yet, despite exposure to these recently strong ‘factor tails’, they have not outperformed since the start of the bond sell-off in early July. We also present a list of stocks that appear particularly vulnerable on a sector-relative basis given their low growth, low volatility and high returns, exposures which have historically been negatively correlated with 10yr Bund yields. These include Sell-rated Endesa, Austrian Post, Atlas Copco, bpost and Sandvik.