6 reasons why « Value » should continue to outperform in 2017

To those who fear market have already priced in a lot of good news, especially on the « Trump » effect on the macro backdrop, and that maybe the « Value » trade is now overcrowded and associated sector rotation (from defensive names to more cyclical ones) is overdone, Morgan Stanley’s equity strategy team, lead by Graham Secker, has some good news. Actually 6… Lire la suite

If you want to make money, you have to be a good… Sector picker

Many fund managers pried their ability to pick stocks, or, as the jargon goes « generate alpha » through stock selection (and with that the handsome fees they charge you). But the following 2 graphs show that rather than picking the right stocks, it’s better to pick the right sectors…

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Is the Quest for Yield Distorting US Equity Markets?

« Low global bond yields are pressuring US Treasury yields, while inflation outlooks are muted and the Fed appears on hold with rate hikes. All of these points favor high dividend yields »… Makes sense although this is massively pushing investors into the most expensive territories of equity markets !

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Always a good question: what’s priced in?

And the answer from Barclays:

« While valuations are certainly not pricing in a full-blown global recession, we are not far away from pricing a 2012-style moderate recession. If such a scenario were to fully materialise, the fundamental floor appears to us to be a STOXX 600 level of 300 (c. 10% below today’s levels). However, if a more benign economic scenario were to occur, as per our economic team’s forecasts, we expect valuations to eventually revert higher. Till further evidence of this materializes, in the near-term, we expect markets to remain volatile and follow economic and political developments. »

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Morgan Stanley Cross asset views after Brexit

MS_cross_asset_views_Jun2016

Source: Morgan Stanley

Interestingly, one week after the event, systemic risk doesn’t seem to be an issue…

MS_cross_asset_views_Jun2016_Systemic_Risk

Source: Morgan Stanley

Views per asset classes:

  • Equities: stay defensive (global earnings have been falling, and valuation are relatively fair)
  • Currencies: USD bull market is not over…
  • Rates: lower for longer
  • Credit: best option for carry

Goldman’s strategy after Brexit

From GOAL report dated June 26:

« Brexit has driven a sharp drawdown in equities
The UK vote to ‘leave’ the EU has triggered a sharp drawdown in European and global equities. We have long argued that equities are stuck in a ‘Fat & Flat’ range given both elevated valuations and a lack of growth. The impact of Brexit on confidence and the ERP, as well as on European growth, increases the risk that we move downward in this trading range. We have highlighted risks of a correction in our recent GOAL – Global Strategy Paper No. 19 and strategies to mitigate this risk. A key concern remains the lack of diversification or availability of ‘hedges’ for equities as most safe assets, in particular bonds, remain expensive alongside equities.

Potential for further weakness & volatility in global equities We think equities will remain volatile and stay defensively positioned in our asset allocation (neutral equities over 3- and 12 -months, overweight cash over 3 months). While we think investors have been lightly positioned into the drawdown, we feel that due to policy uncertainty and lack of growth, risk appetite might remain low in the near term. However, a combination of further declines in valuations and positive growth/policy surprises are needed to stabilise equities within their ‘Fat & Flat’ range.

Lowdown on the drawdown
Comparing the current EURO STOXX 50 drawdown to history indicates that it might continue (most drawdowns have lasted more than a month), valuations might have to drop further and bonds have been less good hedges for equities. Gold and Yen performed best as ‘risk off’ hedges. »

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What to worry about – JPMorgan View

« The uncertainties that made us cut our risk OWs to small have not gone away and merit hedging. The biggest one comes from an early end to the cycle caused by the lack of productivity growth. Inflation will be the warning sign and should be hedged. »

Another good read from Jan Loeys and team at JPMorgan…  Lire la suite

ECB decision and market comments

ECB decision: 60 bn € of asset purchase on a monthly basis, starting in March and for as long as the inflation trajectory of the Eurozone is not sustainable. This was partly priced. The expansion of ECB’s balance sheet is ON, so this will certainly have some impact on markets.

Key items of ECB policy action:

Draghi’s Speech

Asset purchase program

Here are a couple of first market reactions and commentaries.

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15 Trades for 2015 from Merrill Lynch

From Michael Hartnett and Brian Leung at Bank of America Merrill Lynch:

« BofAML’s base case for 2015 is bullish US$, bullish volatility, bearish spreads, bullish real estate, bullish stocks, bearish rates and more opportunistic in commodities & EM. We forecast higher global growth, lower liquidity, no deflation, lower expected returns: global stocks 4-8%, US dollar 3-5%, US house prices 3%, corporate bonds 2-4%, 30-year Treasury -5%, and 1-3% for commodities. 2015 has begun bearishly with lower oil, yields and, today, a buy signal for risk assets from our contrarian Bull & Bear Index.

Our bottom lines: Our conviction in US recovery is high. We expect, by late-spring, lower oil, lower currencies and lower rates to start boosting European and Asian
growth economies.

We believe risk assets will ultimately generate positive returns this year, but investors may need to have patience and tolerate large market swings.
Short-term we expect risk assets to rally into the ECB QE event on Jan 22nd but volatility could quickly reappear in February if the ECB package marks “peak QE expectations”, the US earnings season is impacted by the US dollar and “credit events” related to the oil collapse become more visible. We would be more aggressive buyers of risk later in Q1. »

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New Tactical Navigator Tool from Nomura Says: « De-Risk »

Nomura recently issued a new tool called « Tactical Navigator » to help investor decide how much risk they should put in/redraw from their allocation. Currently, the message is: go hide yourself. Incidently, recent moves in financial markets says the same thing. YTD (only 10 days) performance for various asset classes show: MSCI World down 0.9%, 10Y Treasuries yield -24bp to 1.95% (!), gold up 2.7% to 1,216$/ounce and € down 2.1% against US$. Lire la suite

US investors’ sharp switch out of Europe gathers pace – Goldman Sachs

From report dated Nov 20, 2014:

« The latest US Treasury TIC data shows record outflows from European equities in September at USD27.4bn. The recent data have been volatile but generally very weak, with 3-month average net outflows of USD13bn per month. That pace of outflow by US investors is larger in absolute terms than that seen in the financial crisis period in late 2008 and into 2009. »

While some investors expected this would calm down, apparently that’s not really the case…  Lire la suite

A more favorable backdrop for risk assets – Barclays

On the back of slightly better global growth in 2015 and most importantly accommodative monetary policies, risk assets should prevail next year, says Barclays in its freshly published outlook. Attached is the summary per asset class, and some key introductory remarks to this 168 page document distributed to investors and clients. Enjoy!

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Cheap European stocks with good HOLT score

Here’s a list of investment ideas in the European equity universe, provided by Credit Suisse.

Source: Credit Suisse

Source: Credit Suisse