Resilience Retested What’s Really Going to Drive Equity Returns in 2021 and Beyond?

Michael Lin, Investment Strategist – Active Quantitative Equity Team

As economies continue to re-open, equity markets have been on a tear. For investors looking to profit from improving global growth and earnings momentum, it would appear as though opportunities to own something at a reasonable valuation is becoming harder by the day. While the rotation from Growth to Value appears to have taken some of the ‘extreme disparities’ out of the market, the equity rally has been relentless and speculative behavior has worsened in many respects. For example, margin debt on the NYSE has risen by 72% from a year ago, and leverage ratios are nearing all-time highs.

In this paper, we assess the current market environment in the context of a ‘typical market cycle’. We show that the extremes seen in 2019/20 appear to be normalising, and broad economic recovery is now providing an environment where fundamentals are more likely to drive returns in 2021 and beyond. This backdrop has implications for some of the major return drivers that we use to assess stocks – Value, Quality, Sentiment, and Risk.