March 2021 - Valuation matters (again) - Systematic Fund Manager's Comments

13 April 2021

Emmanuel Hauptmann

The extraordinary increase of interest rates from historical lows since last summer seems to have eventually led to a repricing from the current historically high dispersion of valuations across Equity markets.

The Value Rotation

The outperformance of Growth over Value that has lasted for the last twelve years seems to have reached its top, above the precedent one set in January 2000. The recent outperformance of Value versus Growth stocks has started at the end of last summer, around the time we saw US interest rates bottom. The rotation towards Value has gained some strength in March, with attractive Value picks performing strongly over the month at the same time as some of the most “bubbly” industries and companies in the market corrected.

Source: RAM AI, MSCI, Bloomberg.

EM Growth Tantrum

US Interest Rate increases tend to be strongly unfavourable to Emerging Markets (The infamous Taper Tantrum of 2013 remains in most memories), but the recent interest increase coupled with anticipation of a strong pickup of World GDP growth (the IMF predicting a global Growth pickup of 6% in 2021) has so far left Emerging Markets unscarred. We saw however similarly strong rotations in EM in favour of Value, from the most highly valued Growth stocks, which strongly benefited our Emerging Markets Equities fund.

Source: RAM AI, MSCI, Bloomberg.

Fundamental Shorts Alpha Comeback

After a very complex beginning of the year for fundamental Short-Selling which felt like a fundamental Short-Selling Capitulation by the market (see The Big Short Tantrum, Jan. 2021), Shorts are finally starting to generate alpha in our Market-Neutral strategies again. The most expensive names in our Short model portfolios have started to correct from often bubble-high levels of valuations.

Source: RAM AI.

The same pattern of strong Long Value out-performance and Short alpha comeback has been seen across our Global Developed and Emerging Markets strategies, contributing to a large recovery of our Market-Neutral engines from the tail-events hits of last year.

We still observe large dispersion of valuations in the market after the excesses of previous years and consider likely that the spread of valuations between Long and Short books are likely to converge further.

European Market-Neutral Strategy

Source: RAM AI, Factset Fundamentals.

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