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Value in Europe, Momentum in Asia
Event
In the latest update of the Macquarie Country Alpha Model we separate the
contributions from value, quality and momentum factors. This provides details
on the factors expected to drive a country to outperform and allows investors
to focus on countries according to their preferred style.
Impact
Europe continues to dominate the list of countries with a positive forecast
alpha, largely due to cheap valuations. That said, we are wary of markets like
Spain and Italy that look cheap, but also have weak momentum due to
sovereign risk concerns. We prefer countries like Germany and the UK that
show positive alphas with positive contributions from value and momentum.
Stocks favoured by our analysts in these markets include BMW (BMW GR),
K+S (SDF GR), BG Group (BG LN) and Tesco (TSCO LN).
According to the Macquarie Macro Distance Model and also our own
research into the equity risk premium, we would expect momentum to
outperform. On this basis, we continue to favour Korea, and think the
country’s relative outperformance can continue. For exposure, we like
Hyundai Motor (005380 KS) and Korea Electric Power (015760 KS).
Major markets that are expected to underperform based on the Country Alpha
Model are Switzerland and Australia. These countries look particularly weak
given their relatively high valuations, coupled with poor market momentum.
Stocks rated Underperform in these two countries are Kuehne & Nagel
(KNIN VX) and News Corp (NWS AU).
Outlook
We expect renewed growth expectations to drive a rebound in global equity
markets toward the end of the year. That said, concerns over US growth have
seen 10-year Treasury yields fall to 2.6%, while real 5-year yields are
negative. This is a negative signal for US growth, and given the importance of
the US to the world economy, also a clear sign to generally remain defensive
in terms of global equity exposures.
Our seasonality work also suggests a defensive strategy is correct, as August
and September are the worst months of the year in terms of average returns.
That said, the seasonal peak in market risk is not until October, after which
point risk tends to fall, while average returns tend to rise. In line with history,
we would expect to see far superior risk adjusted returns between November
and April compared to the May to October period.
We therefore recommend a defensive position until September/October
unless we see some combination of sustained upward market momentum, a
decline in the VIX or an increase in US long bond yields before that time.
Based on the view that market returns will improve as a result of seasonal
factors, we suggest increasing exposure to equities and cyclicals from that
point. If momentum stabilises, many European markets offer attractive value
and we would look to increase exposure to Spain, Italy and France.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Value in Europe, Momentum in Asia
Event
In the latest update of the Macquarie Country Alpha Model we separate the
contributions from value, quality and momentum factors. This provides details
on the factors expected to drive a country to outperform and allows investors
to focus on countries according to their preferred style.
Impact
Europe continues to dominate the list of countries with a positive forecast
alpha, largely due to cheap valuations. That said, we are wary of markets like
Spain and Italy that look cheap, but also have weak momentum due to
sovereign risk concerns. We prefer countries like Germany and the UK that
show positive alphas with positive contributions from value and momentum.
Stocks favoured by our analysts in these markets include BMW (BMW GR),
K+S (SDF GR), BG Group (BG LN) and Tesco (TSCO LN).
According to the Macquarie Macro Distance Model and also our own
research into the equity risk premium, we would expect momentum to
outperform. On this basis, we continue to favour Korea, and think the
country’s relative outperformance can continue. For exposure, we like
Hyundai Motor (005380 KS) and Korea Electric Power (015760 KS).
Major markets that are expected to underperform based on the Country Alpha
Model are Switzerland and Australia. These countries look particularly weak
given their relatively high valuations, coupled with poor market momentum.
Stocks rated Underperform in these two countries are Kuehne & Nagel
(KNIN VX) and News Corp (NWS AU).
Outlook
We expect renewed growth expectations to drive a rebound in global equity
markets toward the end of the year. That said, concerns over US growth have
seen 10-year Treasury yields fall to 2.6%, while real 5-year yields are
negative. This is a negative signal for US growth, and given the importance of
the US to the world economy, also a clear sign to generally remain defensive
in terms of global equity exposures.
Our seasonality work also suggests a defensive strategy is correct, as August
and September are the worst months of the year in terms of average returns.
That said, the seasonal peak in market risk is not until October, after which
point risk tends to fall, while average returns tend to rise. In line with history,
we would expect to see far superior risk adjusted returns between November
and April compared to the May to October period.
We therefore recommend a defensive position until September/October
unless we see some combination of sustained upward market momentum, a
decline in the VIX or an increase in US long bond yields before that time.
Based on the view that market returns will improve as a result of seasonal
factors, we suggest increasing exposure to equities and cyclicals from that
point. If momentum stabilises, many European markets offer attractive value
and we would look to increase exposure to Spain, Italy and France.
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