Global Investment Views - February 2021

Relative value game to continue: Value vs Growth

Overall assessment

The resurgence of coronavirus infections and subsequent lockdowns in Europe present near- term headwinds, but vaccine rollouts, progress on the stimulus front, and pent-up consumer demand offer some solace. For investors, the interesting debates are the movement of rates/inflation and effect of these on the pro-cyclical and pro-value tilt. Although the last two are structural stories, not all components in these are attractive. As a result, investors must be very selective and agile and should focus on balance sheet strength.

European equities

While we maintain a bias towards normalisation, we realise that consensus is moving towards a pro-cyclical/pro-value tilt and alarm bells are ringing in some parts of the market. Hence, we remain extremely valuation-conscious, bottom-up, and aim to find cyclical value compartments offering attractive risk/reward profiles. We stay positive on materials and have raised our constructive view on financials, primarily through high-quality insurers and exchange operators. We are optimistic on infrastructure, which we believe is a by-product of all the fiscal stimulus measures. Having said that, we are mindful of the need to remain defensive due to the uncertainty over the virus. We are now more constructive towards defensive areas, such as healthcare. On the other hand, we also seek to identify areas where there are worrying signs and no one knows when the music may stop. We are cautious on discretionary and technology (valuation concerns). Finally, we believe ESG is the single most important trend in asset management and the crisis has only made this more relevant. We are likely to see an acceleration in investor demand, company adoption, and asset manager integration.

US equities

We expect supportive economic policies from the Biden administration, but believe investors should be cautious with respect to potentially higher taxes and higher interest rates. We continue to believe that a sustained rotation out of Growth/high momentum stocks into Value is likely in light of strong earnings improvements in 2021 and the vaccine rollouts. As a result, we are cautious on the former group and are more balanced. This is because we realise there are some downside risks, ie, lower economic growth, policy mistakes, spread of the virus. On a positive note, we like quality Value/cyclicals and reasonable Growth stocks but think investors should be mindful of sectors/companies in which margins could be affected by higher input prices. In addition, the crisis is presenting stock selection opportunities as companies with strong business models are available at reasonable prices and companies without the ability to withstand the slow recovery have been left impaired. We prefer industrials, given they are not challenged by the current low-rate environment, and also like financials as having withstood the worst part of the crisis, they should benefit from potentially higher rates.

EM equities

We are optimistic on equities, particularly on Value/cyclicals over Growth and remain positive on discretionary, industrials, and IT and internet. In the last segment, we strongly prefer regions with attractive valuations, ie, Korea over China.
We also like India, Russia and Greece, but remain very selective and continue to differentiate on the basis of valuation and business model strength. On the other end, we are cautious on healthcare, staples and Chinese financials (although we like insurers).

Definitions & Abbreviations

• Agency mortgage-backed security: Agency MBS are created by one of three agencies: Government National Mortgage Association, Federal National Mortgage and Federal Home Loan Mortgage Corp. Securities issued by any of these three agencies are referred to as agency MBS.
• Asset purchase programme: A type of monetary policy wherein central banks purchase securities from the market to increase money supply and encourage lending and investment.
• Breakeven inflation: The difference between the nominal yield on a fixed-rate investment and the real yield on an inflation-linked investment of similar maturity and credit quality.
• Carry: It is a return of holding a bond to maturity by earning yield versus holding cash.
• Correlation: The degree of association between two or more variables; in finance, it is the degree to which assets or asset class prices have moved in relation to each other. Correlation is expressed by a correlation coefficient that ranges from -1 (always move in opposite direction) through 0 (absolutely independent) to 1 (always move in the same direction).
• Credit spread: The differential between the yield on a credit bond and the Treasury yield. The option-adjusted spread is a measure of the spread adjusted to take into consideration possible embedded options.
• Currency abbreviations: USD – US dollar, JPY – Japanese yen, GBP – British pound sterling, EUR – Euro, CAD – Canadian dollar, SEK – Swedish krona, NOK – Norwegian krone, CHF – Swiss Franc, NZD – New Zealand dollar, AUD – Australian dollar, CNY – Chinese Renminbi, CLP – Chilean Peso, MXP – Mexican Peso, IDR – Indonesian Rupiah, RUB – Russian Ruble, ZAR – South African Rand.
• Composite valuation indicator (CVI): based on a basket of criteria in absolute terms – trailing price-to-earnings ratio (PE), price-to-book value (P/BV) and dividend yield (DY), and ranked in percentile, ranging from 0% to 100% (the percentage of time this basket was cheaper since 1979: 0% never been cheaper; 100% never been more expensive).
• Cyclical vs. defensive sectors: Cyclical companies are companies whose profit and stock prices are highly correlated with economic fluctuations. Defensive stocks, on the contrary, are less correlated to economic cycles. MSCI GICS cyclical sectors are: consumer discretionary, financial, real estate, industrials, information technology and materials. Defensive sectors are: consumer staples, energy, healthcare, telecommunications services and utilities.
• Dividend yield: Dividend per share divided by the price per share.
• Duration: A measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates, expressed as a number of years.
• Equity risk premium: refers to an excess return that investing in the stock market provides over a risk-free security such as US Treasuries.
• FX: FX markets refer to the foreign exchange markets, where participants are able to buy and sell currencies.
• High growth stocks: A high growth stock is anticipated to grow at a rate significantly above the average growth for the market.
• Liquidity: The capacity to buy or sell assets quickly enough to prevent or minimise a loss.
• QE: Quantitative easing (QE) is a type of monetary policy used by central banks to stimulate the economy by buying financial assets from commercial banks and other financial institutions.
• Quality investing: to capture the performance of quality growth stocks by identifying stocks with: 1. high return on equity (ROE); 2. Stable year-over- year earnings growth; and 3. low financial leverage.
• Reaction function: A function that gives the value of a monetary policy tool that a CB chooses, or is recommended to choose, in response to some indicator of economic conditions.
• TIPS: A Treasury Inflation-Protected Security is a Treasury bond that is indexed to an inflationary gauge to protect investors from a decline in the purchasing power of their money.
• Value style: refers to purchasing stocks at relatively low prices, as indicated by low price-to- earnings, price-to-book, and price-to-sales ratios, and high dividend yields. Sectors with dominance of value style: energy, financials, telecom, utilities, real estate.
• Volatility: A statistical measure of the dispersion of returns for a given security or market index. Usually, the higher the volatility, the riskier the security/market.
• Yield curve control: YCC involves targeting a longer-term interest rate by a central bank, then buying or selling as many bonds as necessary to hit that rate target. This approach is dramatically different from any central bank’s typical way of managing a country’s economic growth and inflation, which is by setting a short-term interest rate.
• Yield curve steepening: This is the opposite of yield curve flattening. If the yield curve steepens, this means that the spread between long- and short-term interest rates widens. In other words, the yields on long-term bonds are rising faster than the yields on short-term bonds, or short-term bond yields are falling as long-term bond yields rise.