Can UK stocks keeping outperforming?
UK stocks have been outperforming the global market recently, and our indicators remain supportive, particularly if value and commodity stocks remain in favor.
After lagging for much of the last decade, UK stocks have been strongly outperforming the global market this year in local currency terms, and even in US dollar terms more recently. We have been overweight the UK in our regional allocation guidance since March and remain so based on our bottom-up indicators.
Tilting toward Growth over Value
One of the themes in our sector/style work recently has been to tilt somewhat more toward Growth over Value and Cyclical areas within the US market.
Why? Three key factors support Growth over Value, while one remains a concern.
Our bottom-up aggregated earnings estimate revisions trends continue to favor Growth
The relative performance trend has been shifting back to Growth over Value
However . . . relative valuation of Growth versus Value remains stretched versus historical norms, though the interest rate backdrop is arguably a structural reason for that
Also, the relative risk (volatility) differential of Growth vs Value has moved back in favor of Growth (i.e., Growth is now less volatile than Value on a rolling six-month basis).
Growth rebound looks extended, as do long-term bonds
We have heard a number of client questions about the recent rebound in Growth stocks relative to Value (or Cyclical) stocks, so here we review some of the recent price action and one of the key cross-asset drivers.
The first chart below plots the relative performance of the S&P 500 Pure Growth versus Pure Value indices (top section) along with the 14-day RSI technical indicator (bottom section) as a measure of overbought/oversold conditions.
Vaccine news brought record style rotation in stocks
The headlines on Monday (Nov. 9th, 2020) from Pfizer announcing favorable early results in their COVID-19 vaccine trials, while certainly welcome, clearly caught investors off guard. While the major indices were either up or flat on the day, there was a historic level of divergence within the market among the various styles and sectors.
Such extreme rotations remind us that there is risk in the equity markets even when stocks overall do not fall. Investors focused on relative performance likely either had a huge win or huge loss on Monday.
Growth leadership easing as rotation increases
One of the most notable market trends in recent weeks has been the corrective action in the formerly high-flying US large-cap Growth stocks. The dominant Tech-oriented companies that have been responsible for much of the gains in US large-cap indices for several months finally saw some significant selling pressure in the first two weeks of September.
The first chart below shows absolute and relative returns for the S&P 500 Pure Growth and Pure Value indices (i.e., the style indices restricted to stocks that fall entirely into their indicated style, leaving out those with weight in both indices).