“We think the market re-rating due to an improved macro environment has broadly finished. Stock selection will be back on the agenda for 2014 requiring selective Value exposure,” say the Citi Quantitative Global Research team in their Global Quant Outlook for 2014.
Global investing styles
Analysts Chris Montagu, Liz Dinh, Javier Guardo, Jason Bennett, Matthew J Burgess, Rahul Jalan, James J Murray and David T Chew argue that though global equity markets have been gaining confidence in economic and corporate fundamentals, there still remains an undertone of caution. This has lead to a very strong performance from the Quality style of investing, though the Value and Risk styles have also shown healthy gains.
Pure style performance globally has been as follows YTD 2013:
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Low Risk: -3.7%
Size (Mkt Cap) -2.4%
Price Momentum: 6.1%
Estimates Momentum: 2.0%
US: Investing styles in 2013 led by value stocks
In the US, the chart below shows how the different styles did in 2013 YTD.
The authors comment that Value has put on a strong performance in 2013 in a ‘risk-on’ climate pervading the US markets, and as a result, the style has become relatively ‘dear.’ This is clear from the 12-month forward earnings multiples that have grown from 12x to 16x, indicating that the improvement in macro factors has been discounted.
Value is dear, but Quality offers opportunity
With gains from macro factors likely to be subdued going forward, The Citi analysts suggest that Quality may offer an oasis of opportunity.
Fundamentals will now matter more rather “than binary macro positioning on sentiment,” and therefore, the US market will become a stock-picker’s delight in 2014, say Citi.
Quality is also cheap on a historical basis, and with the added advantages of controlled volatility and better earnings growth forecasts compared to Value.
Say Citi: “Low Quality stocks have re-rated due to a more confident economic outlook whereas High Quality names have become cheaper due to stronger earnings delivery.”
Sentiment will henceforth take a back seat to earnings delivery since macro influences have been priced into the US market. Ride earnings delivery by adopting the Quality investing style.