Global Factor views 2019
- We believe that global macroeconomic growth will modestly decelerate in 2019. Against that backdrop, central banks are likely to tread much more cautiously along the path of monetary policy normalisation.
- We expect corporate earnings to expand more slowly due to a combination of slowing revenues, rising tariffs, fading tax stimulus and margin pressures as labour costs rise.
- While equity market valuations look reasonable after the fall in stock prices in Q4, a more demanding picture for earnings growth is likely to limit the scope for a sentiment-driven re-rating. Within equities, we observe a higher-than-normal level of mispricing, which we believe is supportive of active management.
Given the current market environment, Rosenberg Equities’ views on near-term global factor performance are as follows:
|With a more demanding backdrop for earnings, Quality should perform well as investors favour companies with a proven track record of sustaining profitability and delivering stable earnings growth. Some areas of Quality are expensive, which argues for an active approach to obtaining Quality exposure.|
|Low Volatility typically underperforms when interest-rate expectations rise. Accordingly, it should benefit from a more cautious central bank interest rate policy in 2019. However, given slower growth rates, markets are likely to be sensitive to macroeconomic and earnings news flow, leading to swings in risk appetite and in turn the reward to Low Volatility.|
|Although Value is often challenged late in the cycle, it is currently oversold and cheap by historical standards. Value should outperform as the conditions that have fuelled the recent dominance of Momentum/Speculative Growth subsides. Valuation dispersion is also elevated, meaning increased opportunity to identify undervalued stocks.|
|Fading and less synchronized global growth rates, together with the end of excess liquidity, have removed the conditions that fuelled the Momentum/Speculative Growth market of the past several years. While Momentum has the potential to change quickly, we expect it to be challenged in an environment of increased geopolitical uncertainty that is more volatile and range-bound.|
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Below we provide details of the company-level measures used in our calculation of each Factor: (i) Low volatility: We measure both market volatility (beta) and stock specific risk over both the long term (5-year horizon) and short term (1-year horizon); (ii) Quality: We measure both simple Return on Equity (RoE) and Earnings Sustainability. Earnings Sustainability is Rosenberg Equities’ proprietary measure of earnings quality that predicts the likelihood that a company will deliver positive recurring earnings and sales growth next year. Companies with stable historical earnings growth that has not been distorted by accounting anomalies (e.g. by inappropriate accruals or extraordinary items) will likely have high earnings sustainability; (iii) Value: We use three key measures within the value spectrum: price-to-book, price-to-recurring earnings and dividend yield. In this way, we hope to capture the varying flavours of value investing, acknowledging that they do not always perform in unison; (iv) Momentum: We measure trailing price momentum of a security relative to its local market over the last year, ignoring the most recent month to reduce the effect of short-term price reversal.
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