Prepare for a period of value outperformance when stocks rally

- "Cheap valuations and washed out sentiment suggest a favourable risk-reward for European equities, as long as the global economy is not double-dipping. Our Combined Market Timing Indicator (CMTI) recently reached a buy signal of -0.5 for the first time since April 09. Following a CMTI reading of below -0.5, MSCI Europe has been up on average 9.2% over the subsequent 6 months, with equities up 85% of the time. At the same time sentiment is cautious with the AAII survey reaching its lowest level since March 2009 and 9 consecutive weeks of outflows from mutual funds. MSCI Europe trades on 10.3x 12 month forward earnings compared to a historical average of 14x since 1987. Given the structural headwinds to growth in this cycle 14x PE seems too high to us, however a return to historic averages of 11-12x in the 1970s-1980s would still suggest a further 10-20% upside from today’s levels."
- "Growth and quality factors have trounced value factors since September. From the March 09 lows through to September 09, cheap stocks outperformed expensive stocks by over 30%. In September we noted that the market was not providing sufficient reward to growth and quality factors. Our reliable growth basket traded at record low valuations to the market (see ‘Reliable Growth has never been cheaper’, 14th September 2009) and valuation dispersion became extremely narrow – all of which suggested a need to focus more on growth and quality in addition to valuation. However, since September there has been a significant style rotation away from value and towards growth strategies. High growth stocks have outperformed low growth stocks by over 8% since September, while value stocks have underperformed by 12%. 27 of the top 40 stock picking strategies since September have been related to either growth or quality. This style rotation has become even more pronounced since the market peaked in April as the market has become even more focussed on concerns over global growth."
- "Reliable growth stocks should be long-term winners, but given strong outperformance we would prefer the cheaper end of the reliable growth universe in the next 3-6M. Our reliable growth basket has outperformed steadily over the last nine months and no longer trades at a discount to the market. Structurally these stocks should be long-term outperformers against a backdrop of anaemic GDP in the West. However, given we believe stocks are more likely to go up than down by year end, we would look to rotate toward the cheaper constituents (see ‘Updating our thoughts on reliable growth’, 5th July 2010 for more details)."
- "We would also rotate back into some value screens given the potential for a strong rally in the next 6M. MSCI Europe Growth now trades at an above average premium to MSCI Europe Value. The outperformance of the MSCI Europe Growth index vs the equivalent Value index over the last nine months is high by historic standards – in fact the only occasion where such outperformance was significantly higher than now was 1999/2000. Valuation dispersion has also widened by 1 standard deviation in the last few months. We believe that as and when equities move higher, the market’s focus on quality and defensive growth will become less binary. As such we feel that it is an appropriate moment to screen for stocks that are either oversold or offer exceptional value."
Morgan Stanley European Strategy 20100712

No comments:

Post a Comment