In last month’s commentary, we discussed the extreme relationship between the value and sentiment themes in equity markets, and we warned investors to be wary of reversals in such extreme situations.
The start of September has brought about a reversal in the themes that had been driving some of these extremes, just as we had warned.
Last month, we discussed market concentration in the most extreme expensive and high sentiment pocket of the market; this is the very group of companies that experienced a sharp setback in the first week of September. If we look at the 25 largest companies in the MSCI World Index (see Figure 1), the companies in the top left of this chart – the most expensive stocks with the strongest sentiment – have experienced an average return of -10.6% between August 31 and September 8, while the others have returned -2.5%.
The magnitude of the sell-off in these stocks highlights the risk of investing at times when relationships between themes such as value and sentiment are extremely stretched. It also cautions against having too much concentrated exposure in companies exhibiting these extreme characteristics. In this case, the cross-sectional correlation between value and sentiment was at its lowest level in two decades.
The Bottom Line
We recommend seeking opportunities beyond the concentrated mega caps where more reasonable valuations can be found, with improvements in fundamentals, positive sentiment, and stronger quality characteristics. We see those opportunities in technology, healthcare, telecoms and financials.
For use in EMEA: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Important Risk Information
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The views expressed are the views of Active Quantitative Equity only through September 11, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal. Quantitative investing assumes that future performance of a security relative to other securities may be predicted based on historical economic and financial factors, however, any errors in a model used might not be detected until the fund has sustained a loss or reduced performance related to such errors.
The trademarks and service marks referenced herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
© 2020 State Street Corporation.
All Rights Reserved.
Exp. Date: 09/30/2021