Regional QMIs in Recovery, Value is the main Beneficiary, Take Profits in low Volatility & Momentum
pointing to the ‘recovery’ phase of the cycle. Globally and across the regions
our strongest style conviction during this phase, is to be overweight Value
stocks. In contrast, the risk/reward towards Momentum and low Volatility
stocks now appears to be diminishing and is overall unattractive based on
lofty valuations, extreme investor positioning and less negative macro signals.
* This quarterly Global Style Investing product aims to capture the views of our
regional quant teams. Our style selection framework relies on growth, inflation,
liquidity and sentiment indicators and uses both long-term trends and their 2nd
derivative to identify where are we in the business cycle? The cycle indicator is
referred to as the Quantitative Macro Index (QMI) and is the key input for style
positioning. Additionally, we examine style performance, style valuations,
style characteristics and style stock screens within this note.
* This quarter there is universal agreement across the QMI signals and the 2nd
derivative in macro data is improving. Asia Pac/ GEM is showing significant
strides in its QMI and is now bordering the expansion phase. In the USA and
Europe signals have been mixed and more muted but on balance have also
improved during the past quarter and equally recommend the recovery phase.
* In this phase, our back-tested results suggest long deep Value and more
cyclical/ higher risk styles (small Caps/ high beta). Typically, low Volatility,
Quality, Momentum and Growth act as reliable shorts. The consensus view
across the regions is to be long Value and rotate out of Momentum and low
Volatility stocks.
* Momentum and Low Volatility stocks look very, very expensive in the USA
and Europe reflecting investors' uncertainty for the economic growth backdrop,
the aftermath of the EU referendum, a sharp decline in global bond yields and
general nervousness about the high levels of stock market indices, but this now
appears to be the crowded trade. Valuation of Growth stocks appear less
stretched in the USA and Europe after a major derating in H1, in contrast
Growth stocks look expensive in Asia Pac following a healthy P/E expansion.
Universally, Value stocks appear cheap versus their own history and relative to
both Momentum and low Volatility.
* The stretched and extreme valuation spread of Momentum & low Volatility
versus Value, leads us to believe a significant rotation towards Value is highly
likely. See pages 14-17 for screens of attractive USA, European and Asia
Pac stocks by each style group and where we perceive to be greater
downside risks.