Les perspectives de la gestion systématique avec AXA Rosenberg
- Economy and markets: Trade deal optimism provides boost
- Factors: Shift to ‘risk on’ hurts Low Volatility but lifts Value
- Valuation: It’s always darkest before the dawn
- Earnings: Room for improvement
- Outlook: Fragile up-tick in 2020
Economy and markets
Global equities had a strong final quarter of the year, with the MSCI World Index advancing 8.3% in dollar terms. The announcement of a ‘Phase One’ trade deal between the US and China and a reduction in uncertainty regarding Brexit helped lift markets worldwide. US stocks were bolstered by strong domestic economic data, encouraging corporate results, dovish monetary policy by the Federal Reserve (the Fed) and the easing of trade tensions; the three major US indices registered all-time highs during the period. European shares also gained, with UK stocks buoyed by trade optimism and the Conservative Party victory in December’s general election.
Sector-wise, traditional defensives (with the exception of healthcare) underperformed the broader market in a risk-on environment. Pro-cyclical sectors outperformed, with technology stocks generally leading the charge across most major regions. See Appendix for more details.
Our factor monitor, Exhibit 1 below, plots factor returns in Q3 and Q4 2019. The monitor is grouped by the four factor families – Low Volatility, Quality, Momentum and Valuation – and shows both simple common factors as well as Rosenberg Equities’ proprietary factors.
Exhibit 1: Rosenberg Equities Factor MonitorSource: Rosenberg Equities. Factor returns to 31 December 2019. The charts show univariate factor returns based on the MSCI World Index universe and are square root of market cap weighted and net of market returns. Factors shown are simple risk factors and Rosenberg Equities’ proprietary factors - see Important Information section for additional information on Rosenberg proprietary measures. Rosenberg proprietary factors are not individually available as investment strategies and the factor returns shown should not be used to extrapolate the performance of Rosenberg Equities’ strategies. Past performance is not a guide to future performance.
During September, investor risk appetite increased as trade tensions eased and economic data surprised on the upside. This led to a sharp reversal in factor performance away from Low Volatility and Quality towards Value. While the intensity of the initial snap-back subsided, these factor trends continued into and throughout Q4 2019.
The worst-performing factor in Q4 was Low Volatility which, according to our data, experienced its weakest calendar quarter since Q4 2016. Momentum also underperformed given its current alignment with Low Volatility. Perhaps surprisingly given the ‘risk on’ nature of the market, Quality only modestly underperformed in Q4; taking a closer look, we can see that this was due to the strong performance of higher-beta technology stocks that also exhibited quality characteristics. Driven by a more pro-cyclical market, Value was the best-performing factor in Q4, with positive performance across both book value and earnings dimensions, as well as Rosenberg Equities’ proprietary valuation measure.
In our recent paper, “Value investing in a growth stock bull market: it’s always darkest before the dawn”, we showed how the recent strong gains in already richly-priced stocks had driven equity market mispricing to its highest level in 20 years. Such elevated mispricings have, in the past, preceded significant changes, such as those following the Nifty Fifty bubble in the early 1970s and the Dotcom bubble of the late 1990s.
The chart below echoes this view, plotting the rolling 10-year annualised outperformance of the 20% of US stocks with the lowest price-to-earnings ratios over the 20% with the highest ratios. The consistent outperformance of lowly valued companies is clear – the stocks with the lowest P/E ratios have delivered higher returns (blue marks in the chart) in 94% of monthly rolling 10-year periods since 1961. The recent ascendancy of the most expensively valued stocks, then, is highly unusual – the 2010s were only the second decade, after the 1990s, in which they outperformed.
While such anomalous conditions are clearly challenging for valuation-oriented investors, the chart also offers some comfort. In the past, periods of outperformance by high P/E stocks have been followed by sharp, and enduring, reversals in which lowly-valued stocks have regained market leadership. We expect the same to occur as the recent growth stock bull market comes to a conclusion, setting up a much more favourable environment for value investors in the decade to come.
Exhibit 2: Rolling 10-year annualised outperformance of low vs. high P/E stocks in the US market, 1961–2019
Source: WisdomTree 2020 Outlook https://www.wisdomtree.com/-/media/us-media-files/documents/resource-library/quarterly-outlook/on-the-markets.pdf; Kenneth French Data Library, returns to the highest and lowest 20% of stocks by P/E, 7/31/1951–11/30/2019; Rosenberg Equities.
Global equity markets may be touching multi-year highs, but revisions into earnings season are still muted – we believe this is a positive signal for future returns. The recent trend has been good, particularly when looking at earnings magnitude – but there is still room for improvement, especially on earnings breadth measures. The chart below plots the analyst revision ratio (up vs. down) alongside the returns of the MSCI World Index. This shows that earnings revisions have been on the low side following the concerns over trade and Brexit impact on global equities. However, with the first stage of a US-China trade agreement signed, reduced Brexit uncertainty since the UK election and the Fed unlikely to raise interest rates any time soon, the cause for pessimism is evaporating. Historically, as earnings momentum picks up, markets have rallied.
Exhibit 3: Earnings forecast revision ratios and index returns, MSCI World, 2009-2019
Source: IBES, MSCI. Index returns in USD. Data from 31/01/09 to 31/12/2019. Earnings revision ratio is calculated by taking the difference between the number of analyst upgrades and analyst downgrades, divided by the total number of analyst revisions on a monthly basis. An earnings revision ratio above zero means that there were more upgrade revisions than downgrade revisions.
Global economic growth has been resilient as stimulus has found traction. The interim trade deal between the US and China should help drive external growth and further bolster industrial activity in the near term. Looking ahead we expect:
- Any trade-related rebound to be muted as political uncertainty weighs on business investment and US domestic demand. In the Eurozone, manufacturing weakness risks spilling over to other areas of the economy.
- We expect the Fed to hold rates for most of 2020, but remain poised to ease on any signs of weakness towards year-end. The ECB’s room for manoeuvre is limited.
- Global equities expected to deliver 10% earnings growth in 2020, well spread across most major sectors.
- Despite re-rating in 2019, equity valuations look attractive relative to government bonds and only neutral in absolute terms. Market-wide valuations also mask a significant divergence between stock valuations, offering opportunities for stock pickers.
Global sector returns (MSCI World Index), all periods as at 31 December 2019Source: Rosenberg Equities, MSCI. Exhibit shows cumulative return of each sector in USD over the period shown to 31/12/19. Sector returns are based on GICS classifications, calculated with gross dividends re-invested in USD terms.
Regional sector returns, Q4 2019Source: Rosenberg Equities, Thomson Reuters DataStream, I/B/E/S, S&P, MSCI as of 31/12/19. Past performance is not a guide to future performance. It is not possible to invest in an index. Index returns calculated with gross dividends re-invested in local currency terms. Sectors based on GICS classifications.
Additional information on Rosenberg proprietary factor measures: ‘Rosenberg Quality’ combines proprietary measures of Earnings Sustainability and forecasted change in Earnings Sustainability; ‘Rosenberg Value’ combines proprietary valuation and earnings forecast models as well as a machine learning ‘value trap’ model; ‘Rosenberg Momentum’ combines price momentum with analyst revisions and a natural language processing news sentiment measure.
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