Real value?
Share
The debate about “quality stocks” versus “value stocks” goes on. It’s not really about sectors - often just random classifications of companies with often different dynamics. It’s about certain types of companies. The market loves companies displaying a high degree of stability and control of their business. There are many ways of showing how quality is now expensive and value is cheap - though the pedant will point out that value by definition is cheap. We say that cheap is now even cheaper!
The charts below show how expensive the top decile by quality is vs the rest of the market. (blog continues below)
If you buy a basket of the 10 per cent highest quality companies in the world, then you have to pay 20 per cent premium and you get growth that is probably lower than the rest of the market (across the cycle). That’s because high quality companies are often very defensive. The trend of these companies getting expensive, however, started ten years ago. So timing the turning point will be tough.
That said, the last chart below shows that, given investors’ fears, high beta stocks (‘proper’ equities) now trade at the largest discount to low beta stocks (bond-like equities) since the market’s bottom in march 2009. So the quality trade is getting crowded and stretched. Some technical indicators are showing tentative signs that a rotation out of global food & beverage stocks /tech/energy into, for example, European telecoms is happening.
Is that exploiting “real value”? It’s all relative, of course. We need to have a break in sovereigns or a positive inflation/growth-surprise leading to renewed risk appetite before bond-like equities start to de-rate, I feel. The question isn’t whether. It’s when.
______
Jacob de Tusch-Lec is manager of the Artemis Global Income fund.
To receive more relevant articles like this one, why not sign up to our briefings and breaking alerts by clicking here and Follow @fundweb
