Global Factor Views: Positive on ‘Quality’ equities
- 03 August 2022 (5 min read)
- Global growth continues to feel the pressure in the current macroeconomic environment
- The central bank tightening cycle is mostly priced in, limiting further bond yield upside
- Equities are looking cheaper in relative terms, and we presently favour 'Quality' stocks
The Ukraine war continues to pose a material supply-side shock, driving inflation higher and slowing post-pandemic growth. Given the present backdrop, we forecast global growth to rise by 3.1% this year and 2.8% in 2023.
Inflation has not yet peaked, and most central banks will continue to raise interest rates and tighten policy, although much of the anticipated tightening is now priced in, limiting further bond yield upside. In our view equity valuations now look reasonable but not cheap.1
However, given where we are now - elevated inflation and risks to growth - we anticipate that corporate earnings will come under pressure in the coming months and as such we advocate caution for the rest of 2022.
Given the present environment, we outline our outlook for equity market factors below:
Quality: Positive
Quality - i.e. companies with more consistent earnings and typically less share price volatility - did not deliver its normal level of defensiveness during the market correction during the first half of 2022.
This is chiefly because of its lack of oil exposure and because ‘quality growth’ de-rated, as real interest rates (taking inflation into account) rose.
However, we remain positive on Quality stocks because we do not expect significant further increases in real yields - bond interest payments after accounting for inflation - meaning the de-rating headwinds experienced by ‘quality growth’ is likely to be behind us.
Furthermore, corporates face a slow growth or even recessionary macroeconomic outlook, and earnings growth is likely to slow. As such, we believe investors will favour - and may even pay a premium for - companies with a proven track record of earnings growth or which are beneficiaries of secular growth trends, such as the transition to a clean economy.
- U291cmNlOiBBWEEgSU0gYXMgYXQgQXVndXN0IDIwMjIuIFRoZSB2aWV3cyBleHByZXNzZWQgYWJvdmUgYXJlIGFzIG9mIHRoZSBkYXRlIG9mIHRoaXMgZG9jdW1lbnQuIE5vIGd1YXJhbnRlZSBvciB3YXJyYW50eSBpcyBtYWRlIHJlZ2FyZGluZyB0aGUgb3V0bG9vayBhYm92ZS4gSW52ZXN0b3JzIHNob3VsZCBub3QgYmFzZSB0aGVpciBpbnZlc3RtZW50IGRlY2lzaW9ucyBvbiB0aGUgY29tbWVudGFyeSBwcm92aWRlZCBhbmQgc2hvdWxkIGNvbnN1bHQgdGhlaXIgYWR2aXNlcnMgYmVmb3JlIGRvaW5nIHNv
Low volatility: Neutral
The Ukraine crisis has added to inflationary pressures but damaged global growth expectations and investor risk appetite, leading to a sharp equity market correction.
Against this backdrop, it should come as no surprise that lower volatility stocks - those which in relative terms generally experience lower levels of volatility - outperformed the market in the first half of the year.
A slow growth or even recessionary macroeconomic outlook continues to argue in favour of the defensive attributes of the style. However, we remain neutral because Low volatility price-to-earnings (P/E) multiples are relatively elevated, and the style would likely underperform sharply in a scenario where macro conditions surprise on the upside.
Value: Neutral
We moved overweight Value in January (maintaining that position despite the outbreak of the Russia-Ukraine war) because rising real rate expectations favoured short duration stocks and Value – stocks which appear to be trading for less than their underlying value - was cheap.
But we have downgraded our outlook for Value to neutral because we do not expect further significant increases in real yields and the outperformance of Value this year means that the valuation gap between Value and Growth has normalised.
We remain neutral as the current uncertain macro and geopolitical outlook still argues in favour some ‘defensive value’ sectors and, while Value is no longer relatively cheap, neither is it relatively expensive.
Momentum: Negative
Price momentum as a factor captures stocks that have a positive price change, relative to the market, over the last 12 months.
Currently price momentum is correlated with low volatility and defensive areas of the market. We would prefer to obtain defensive exposure directly and as such recommend an underweight position in price momentum to avoid over-exposure to a scenario where macro conditions surprise on the upside and markets sharply reverse.
With a more demanding outlook for corporate earnings, our preferred measure of investor sentiment continues to be the momentum of near-term earnings revisions.
Disclaimer
This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
Some of the services listed on this Website may not be available for offer to retail investors.
This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.