30 September 2019, Issue 828
Global Market Commentary
- United States: US stocks hit 3-Week Low as trade tensions rise. Last week was dominated by political drama in Washington with a deepening trade war. For the entire week, the Dow fell by 0.43 percent to 26,820.25. The S&P 500 index fell by 1.01% to 2,961.79. The Nasdaq fell by 2.19% to 7,939.63.
- Europe: European Commission President Jean-Claude Juncker told a German newspaper last Friday that Britain would be responsible if a Brexit deal is not reached. Over the week, the UK’s FTSE 100 index was up 1.11%, the German DAX index fell by 0.70%, and the French CAC40 index fell by 0.88%. The STOXX 600 index fell by 0.30% for the week, to 391.79 points.
- Asia: Bloomberg reported last week that Trump administration officials are weighing delisting Chinese companies from American stock exchanges and preventing US government pension funds from investing in the Chinese market. Over the week, the Nikkei 225 index dropped by 0.91% to 21,878.90. The MSCI Asia Pacific Index fell by 1.54 percent to 156.92.
- United States: US 10-year Treasury yields have collapsed nearly 100 basis points in 2019 and are about 35 bps from its lifetime low. For the whole week, the yield on the US 10-year government bond fell by 4 basis points to 1.684%.
- Eurozone: German private sector activity shrank for the first time in 6-1/2 years as a manufacturing recession deepened unexpectedly. For the whole week, the German 10-year bond yield fell by 5 basis points to -0.575%.
- Oil price: Oil prices fell sharply on Friday on easing tensions in the Middle East. Over the week, New York oil futures fell by 3.75% to close at $55.91 a barrel.
- US Dollar: Increased political tensions on both sides of the Atlantic kept the USD in demand. For the whole week, the Dollar Index rose by0.261% to 98.513.
- Renminbi: For the whole week, the yuan fell by 0.114% against the US dollar at 7.088.
- United States: The US is unlikely to extend the temporary exemption to allow US companies to supply to Huawei, but does not rule out the possibility of imposing additional penalties on Huawei’s allies.
- United States: Trump said that he hopes the United States and China can reach an agreement that is beneficial to both sides, but he will not accept a bad agreement.
- United States: The New York Federal Reserve bought $65.8 billion securities through a repurchase operation. The Governor of the New York Federal Reserve said that the currency market turmoil raised questions about the appropriate level of reserves.
- Eurozone: FTSE Russell announced that it will not include China’s bonds for the time being.
- Eurozone: It is reported that the US may impose tariffs on nearly $8 billion of EU goods, while the EU considers tariffs on more than $4 billion of US goods.
- Eurozone: European Central Bank President Mario Draghi said the central bank may maintain its policy of monetary easing to support long term economic growth, while beware of the side effects of its unconventional monetary policy.
- Japan: US fashion retailer Forever 21 is leaving Japan.
- Japan: The United States and Japan reached a limited trade agreement. According to the terms of the agreement issued by the White House, Japan will immediately eliminate tariffs on more than $1.3 billion of US agricultural products. Also, through stages, there will be reduction in tariffs on fresh and frozen beef, fresh and frozen pork, etc.
- China: Chinese USD debt will usher in a risky year next year, and the current redemption crisis may just be the beginning.
|China Market Commentary|
|• Chinese Foreign Minister Wang Yi said China is willing to buy more American products.
• China’s Q4 GDP growth rate may be less than 6%, the Chinese Central Bank’s loosening policy may not be able to keep up with the Federal Reserve’s pace.
The Comeback of Value over Growth?
Value-stock rotation has become a hot topic of conversation among fund managers and investors lately.
In the last 10 years, growths stocks have outperformed value names considerably, with the Russell 1000 growth index climbing over 309% versus the Russell 1000 value index’s 200% gain. However, the trend has slightly reversed since the beginning of September as value outperformed growth by 4.2 percentage points. Analysts such as Savita Subramanian, the head of U.S equity and quantitative strategy at Bank of America Merrill Lynch, and Lisa ShalettNow, the CIO of Morgan Stanley Wealth Management, claimed that they are seeing a massive rotation from higher growth momentum stocks toward the value-style stocks. Now, the interesting question is if this outperformance is a temporary call only or the trend is really flipping that we should shift to value-strategies for a multi-year run of outperformance?
What is Value and Growth stocks?
Value stocks, often defined as companies with stable fundamentals, whose shares usually trade at lower prices relative to their fundamental measures of value, like earnings, book value of assets, or net worth. On the other hand, Growth-oriented stocks are companies expected to grow faster in metrics like sales, earnings and book value than the average stocks, and they tend to trade at higher valuations. By sector, financials is the biggest Value play. Consumer Staples, energy, real estates and utilities also tend to be Value-oriented, while cyclical sectors like technology and consumer discretionary are generally viewed as Growth play.
What triggers the recent outperformance of Value?
Value and Growth are like opposite ends of a pendulum, which exhibits a negative correlation as one side does well, the other side doesn’t. In the last few years, Value actually has mounted a multi-month rebound several times, but eventually the trend didn’t sustain. The outperformance of Value this time could be due to Wall Street’s cautious attitude towards seemingly endless Sino-US trade disputes, which then driving investors to unwind their excessive position in Growth stocks and turn towards safer investment such as utilities sector. Besides, the recent upticks in short and long-term interest rate policy is also pushing investors to rate sensitive Financials sector. European financials have rallied nearly 10% since the beginning of September, which has actually given U.S. financial stocks boost (while financial sector account for over 20% of the value index).
Cheaper valuation is another reason too. The Russell 1000 Value Index now trades at about 17 times forward earnings compared with Russell 1000 Growth Index of 27 times, which is one of the wideset gaps since the global financial crisis.
What is needed for a more sustainable shift to Value?
Rotation to Value typically happens in the late stage of an economic expansion. It generally outperforms when macroeconomic data start to recover from depressed level and corporate profit growth reaccelerates. Therefore, a more sustainable shift from Growth to Value plays generally requires a much stronger economic backdrop, e.g., >3.5% real GDP growth, which is not in place for the current moment. According to Bloomberg consensus forecast, US real GDP growth is expected to further decelerate from 2.3% in 20019 to 1.7% in 2020, and may only slightly recover to 1.8% in 2021.
As Financials sector is the biggest Value sector, it will be difficult for Value to outperform without the sector at least participating. As such, a steepening yield curve is critical and necessary for the sector to regain investors interest. However, with the US Fed may further ease monetary policy and to re-introduce the quantitative easing (QE) next year, it is more likely for the current yield curve to become flatten again than steepen, which will then curtail the profitability of the financial sector.
To conclude, we see the current economic backdrop is no enough to say the trend is changing to a period where Value outperformance Growth for years, but it’s at least enough to be aware. We will not be surprised if Value will outperformance Growth over the next few months, but we think the outperformance would likely be capped as global monetary and quantitative easings continue.