A recent report from Nomura Markets Research highlights several structural issues that are challenging portfolio managers in volatile and unpredictable financial markets today. Inigo Fraser-Jenkins and her team of quantitative strategy specialists argue point out that not only do portfolio managers have to deal with compressed multiples in a low return environment, they also have to consider the real possibility of deflation.
Deep value hard to find today
The Nomura team emphasizes that mean-reversion of stock valuation is a useful tool for stock pickers. “There are various reasons why mean reversion works, but probably the easiest way to think about it is that the market tends to extrapolate recent out- or underperformance of a stock in terms of earnings growth too far in the future.”
Fraser-Jenkins et al. argue there are good reasons to think that this effect can persist over the long term. They note, however, at certain points in a macroeconomic cycle the effect is less strong, and that we are currently in one of those periods.
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