Global Equities Perspective - Rosenberg Equities

Economy and markets

Global stocks continued to make solid gains in the second quarter as the roll-out of COVID-19 vaccinations and further signs of economic recovery boosted investor sentiment. Growing inflationary pressures, however, dominated headlines and led to sharp declines in early May. In June, the US Federal Reserve indicated that it could start to raise interest rates sooner than expected – albeit only in 2023. This initially rattled markets, but stocks soon rallied to reach new all-time highs as investors appeared to shrug off their inflationary concerns. Worries about the pandemic also caused bouts of unease as infections spiked in several countries early in the quarter, especially India, and as the highly contagious Delta variant of COVID-19 spread around the world. With investors’ risk appetite nonetheless remaining strong, cyclical stocks and sectors led markets during the quarter, with real estate, energy – a beneficiary of higher oil prices – and technology all outperforming. Underperformance was seen in consumer-related sectors. Utilities, a typically defensive sector, also delivered weak returns over the period.

Factors

In last quarter’s Perspectives, we highlighted the unusual decoupling of two normally closely related investor-sentiment-driven investment strategies, illustrated by the paltry overlap between the top quintiles of price momentum and analyst earnings revisions. This quarter we use the same framework to report on an equally noteworthy recoupling – that of the momentum and value factors after several years of disagreement.

Value and momentum rarely see eye to eye. The highest value stocks tend to be those trading at the lowest prices relative to their fundamentals; and stocks don’t tend to remain at low prices for long if they sharply outperform their local market – which is what the momentum factor reflects. The top quintile of the book-to-price flavour of the value factor has had an average overlap of less than 10% with price momentum over the past 15 years, compared with about 14% for earnings to price. However, in both cases, there is considerable volatilility around the average: the percentage of holdings common to both the value and momentum factors has ranged from essentially zero near the tech bubble peak to a high of 30% shortly after the bubble burst. Two decades later, the relationship between value and momentum has just performed a similar U-turn. The degree of overlap between the factors has surged from a cyclical low of less than 5% late last year to 20% and 25% for book-to-price and earnings-to-price, respectively, at the end of June. These are the highest numbers since the brief value rebound after the US election in 2016.