April 23, 2021

Equity sector models and strategy: “milder” rotation phase two. OW Value and Cyclicals

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In Short

At the end of 2019 we introduced our proprietary equity valuation tool “Quant signals for EU equity sectors and styles” to yield indications of over- or undervaluation for different sectors and styles of European equities. The regression-based models use macro- and financial variables to produce fair value estimates of the ratio between the MSCI Europe Sector/Style index and the broad MSCI Europe index.
Equity sector models and strategy: “milder” rotation phase two. OW Value and Cyclicals
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Highlights:

 
  • We provide an assessment of European sectors and styles judging from the signals produced by our quant models, further enriched by our qualitative analysis.
  • Undervalued based on quant: energy, HPP, and software. Overvalued: autos, retail, comm. & prof. services, cons. services, telecoms, materials, and semiconductors.
  • Among European styles, undervaluation is indicated for defensive, small cap and min volatility. Low leverage, large cap value and cyclicals look expensive
  • Incorporating also our qualitative analyses, we maintain a tilt to cyclicals and value – with higher selectivity (more financials and energy) and lower UW on defensive.
  • The rotation into value (higher OW) and cyclicals (lower OW) sectors is well advanced but not exhausted as GDP, yield and M1 momentum remain sanguine, together with policy support. Value stocks, in particular, are a hedge against a surprise spike in bond yields, and likely to benefit from the cyclical upswing and rising inflation expectations.
  • OW: financials, energy, materials, and software. Underweight cons. services (new), media, real estate (new), and telecoms. We bring household & personal products to neutral from UW.

 

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Equity sector models and strategy: “milder” rotation phase two. OW Value and Cyclicals
April 23rd, 2021

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