– Which investment style is
working? Beta remains the worst factor on which to pick
stocks. This is heartening for bulls, because beta only
performs in maturing bull markets. Through the market
cycles (except for the tail end of bull markets), high-beta
baskets tend to underperform – and rightly so. Beta
drives the hurdle rate of return for a stock, and a higher
beta means an elevated rate, making the task of making
money that much harder.
Market becoming pro-cyclical: Meanwhile, the recent
pick-up seen in growth factors persists partly at the
expense of quality and partly at the cost of ownership
and momentum styles. Thus, the market is paying
greater attention to EPS growth as well as to capex and
financial leverage, unlike the market’s leaning for quality
(high ROE, low capex, high FCF and low financial
gearing) since 2008. ROE and FCF are not generating
the performance they did even as recently as three
months ago. These are early shifts from a pro-defensive
to a pro-cyclical bias, and we expect them to deepen.
However, investors should not confuse these shifts with
buying beta; they should also be distinguished from
value styles. Value continues to be a losing style, as it
has been for the past five years. Low P/E, low P/B and
high yield are still losing money.
Market starting to go counter consensus: Quality
has been the best style over the past five years, followed
by momentum and the consensus view. The market
continues to back trailing winners – indeed, this was
the best-performing style in June. However, counter-
consensus views appear to be gaining precedence in
contrast with the market’s preference for the consensus
opinion over the past several months. Mega cap has
been winning all along, and we have not seen any
perceptible shift in the market’s choice of size.
GARP is our preferred style: Reasonably priced
growth remains our mantra for 2013 – we think quality
factors will continue to lose ground as the economy
troughs and growth becomes more broad based. There
are risks to this forecast, with global risk appetite and
domestic policy action being the most pertinent.
��
working? Beta remains the worst factor on which to pick
stocks. This is heartening for bulls, because beta only
performs in maturing bull markets. Through the market
cycles (except for the tail end of bull markets), high-beta
baskets tend to underperform – and rightly so. Beta
drives the hurdle rate of return for a stock, and a higher
beta means an elevated rate, making the task of making
money that much harder.
Market becoming pro-cyclical: Meanwhile, the recent
pick-up seen in growth factors persists partly at the
expense of quality and partly at the cost of ownership
and momentum styles. Thus, the market is paying
greater attention to EPS growth as well as to capex and
financial leverage, unlike the market’s leaning for quality
(high ROE, low capex, high FCF and low financial
gearing) since 2008. ROE and FCF are not generating
the performance they did even as recently as three
months ago. These are early shifts from a pro-defensive
to a pro-cyclical bias, and we expect them to deepen.
However, investors should not confuse these shifts with
buying beta; they should also be distinguished from
value styles. Value continues to be a losing style, as it
has been for the past five years. Low P/E, low P/B and
high yield are still losing money.
Market starting to go counter consensus: Quality
has been the best style over the past five years, followed
by momentum and the consensus view. The market
continues to back trailing winners – indeed, this was
the best-performing style in June. However, counter-
consensus views appear to be gaining precedence in
contrast with the market’s preference for the consensus
opinion over the past several months. Mega cap has
been winning all along, and we have not seen any
perceptible shift in the market’s choice of size.
GARP is our preferred style: Reasonably priced
growth remains our mantra for 2013 – we think quality
factors will continue to lose ground as the economy
troughs and growth becomes more broad based. There
are risks to this forecast, with global risk appetite and
domestic policy action being the most pertinent.
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