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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%.