MS : India Strategy : Whats Your Style?
Market Reverts to Quality
What's working? Quality is back to the fore. After losing ground to growth factors for a few months in 2013, ROE and FCF/sales are once again at the helm of affairs. ROE became the best style to pick stocks in July - high ROE companies delivered the best performance. Free cash flow was ranked next to ROE in terms of how its stock picking efficacy changed in July. In contrast, growth factors, notably EPS growth, lost ground. That said, EPS growth is still a better stock selection factor than revenue growth, implying that the market is still looking for stocks of companies with expanding margins.
The best three factors in July were ROE, high PB and high 12M performance - so the market is paying respect to quality, ignoring valuations and buying trailing winners. Beta remains the worst factor to pick stocks followed by debt-equity and 1-month performance. The appearance of 1M performance on this list of worst performing styles just backs up the change in style from growth to quality that happened in July.
The market, which was becoming pro-cyclical in 1H2013, is dithering on a growth recovery. We think this makes sense given the severe tightening initiated by the RBI in July. Over the past five years, the market has leaned towards quality (high ROE, low capex, high FCF and low financial gearing) followed by momentum and ownership. Value continues to be a losing style as it has been for the past five years. Low PE, low P/B and high yield are still losing money. Counter-consensus views appear to be gaining precedence in contrast to 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 for size.
Following the RBI policy change, we have shifted our style preference to defensive over cyclicals, quality over junk and growth over value. The risk to this view is that US labor data disappoints, prompting a reversal in RBI policy, an early general election pushes the market higher in anticipation of a polarized outcome, or India undertakes a large-scale global capital issuance.
The best three factors in July were ROE, high PB and high 12M performance - so the market is paying respect to quality, ignoring valuations and buying trailing winners. Beta remains the worst factor to pick stocks followed by debt-equity and 1-month performance. The appearance of 1M performance on this list of worst performing styles just backs up the change in style from growth to quality that happened in July.
The market, which was becoming pro-cyclical in 1H2013, is dithering on a growth recovery. We think this makes sense given the severe tightening initiated by the RBI in July. Over the past five years, the market has leaned towards quality (high ROE, low capex, high FCF and low financial gearing) followed by momentum and ownership. Value continues to be a losing style as it has been for the past five years. Low PE, low P/B and high yield are still losing money. Counter-consensus views appear to be gaining precedence in contrast to 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 for size.
Following the RBI policy change, we have shifted our style preference to defensive over cyclicals, quality over junk and growth over value. The risk to this view is that US labor data disappoints, prompting a reversal in RBI policy, an early general election pushes the market higher in anticipation of a polarized outcome, or India undertakes a large-scale global capital issuance.
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