In a "world of disappointments", where beta is king and where alpha has become a joke (or, now that equity is a risk-free asset and debt is risky, is outright punished) where growth no longer exists, drowning under the weight of $200 trillion in debt, and where value strategies have been all but forgotten replaced instead with "stories" about companies that have no cash flows but just might be "the next big thing" (one day), what should one to do? Why, engage in the most idiotic of strategies: chase momentum.
At least that is Citi's recommendation, and - we are very sad to say - in this broken "market", it works.
Here is the summary from the note by Citi's Jonathan Stubbs
World of disappointments… — The post-GFC world has been consistently disappointing, in terms of growth expectations. Economists and analysts have both consistently lowered GDP and EPS growth expectations at a global level.
...has not stopped equity bull — Despite this backdrop, equity markets have performed strongly over the same period. There has been enough growth to support rising share prices. The growth “hurdle rate” on Planet QE appears to be pretty low.
Disappointments drive momentum bull — This world of disappointment has been responsible for one of the most important equity market themes of the past few years: outperformance of momentum strategies, eg earnings, dividends, estimates.
Favoured Research Quant style — Our research Quant colleagues, Chris Montagu and team, have placed a strong emphasis on the importance of Estimates Momentum over the last few years. It remains one of their preferred Quant styles.
Momentum winning — We show that investors who have run disciplined earnings and dividend momentum strategies over the last 5 years in Europe have performed strongly. Our Research Quant colleagues show the same on a style basis.
Momentum strategies — We show momentum strategies using relative earnings trends and a) P/E relative, b) P/E relative vs 10-year range, c) normalised P/E, d) price/book relative. Insurance, Banks, Autos and Utilities appear in all four. We also show momentum strategies using relative dividend trends and DY relative. Three sectors look attractive on both measures = Media, Insurance and Banks.
Momentum stocks — Stocks with positive earnings momentum and a) low P/E relative = UBS, Unicredit, Daimler, IAG, b) normalised P/E = Peugeot, KPN, Aegon, Total, Aviva, c) low price/book relative = UBS, Intesa Sanpaolo, Veolia, Bouygues. Stocks which score well on positive relative dividend trends and DY above market DY = Next, Lloyds, ING, Allianz.
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Missed out on "trading" like an idiot? Don't worry: the global economy is in a tailspin, so you will have ample opportunity to give your inner idiot access to an E-trade terminal.
This cycle has disappointed, in terms of growth. But, asset prices, including share prices, have enjoyed super-strong nominal and real returns. Economists and equity analysts have been under-whelmed by (almost) perpetually downgrading GDP growth and EPS growth estimates. But, this has not hampered the post-2009 equity bull market. Disappointments = a lot and often; European equity returns since 2009 lows = 170% (global = 187%).
This world of disappointment has been responsible for one of the most important equity market themes of the past few years — outperformance of momentum strategies, eg earnings, dividends, estimates. Companies, and sectors, which have been able to avoid disappointments (or downgrades) have tended to outperform in the last few years. We have consistently allocated a high weight to momentum within our models, eg we currently have a combined 20% weight to earnings and dividend momentum in our European Sector Attribution Model.
Economists and analysts have tended to over-estimate potential GDP and EPS growth rates since 2009. Both groups have spent most of their time downgrading respective forecasts.
Well that's great news right? Maybe not. But this is:
Despite a backdrop of consistent downgrades to GDP and/or earnings growth forecasts over the last 5 years, equity markets have performed strongly. Growth has been disappointing, consistently so. But, overall, there has also been enough growth to support rising share prices so far in this cycle. As we have previously argued, the growth “hurdle rate” on Planet QE appears to be pretty low.
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Figure 17 and Figure 18 show the performance of a disciplined earnings momentum strategy in Europe, using our own European Forecast Monitor database. At the start of every quarter we “buy” or “sell” stocks based on the 6-month change in their 12- month forward earnings relative to the market. A 6-month change above 8% goes into the long bucket and below -8% goes into the short bucket. We then hold and observe for the following 6-months. Each bar in these charts represents the 6- month relative return of these buckets.
Positive momentum strategies continue to do better than negative momentum ones. We have written much over the years about this. In short, positive momentum stocks tend to have longer duration. Negative momentum stocks have often underperformed in the months leading up to inclusion in the short bucket and can perform better should relative earnings underperformance slow.
The summary:
This cycle has disappointed, in terms of growth. But, asset prices, including share prices, have enjoyed super-strong nominal and real returns. This world of disappointment has been responsible for one of the most important equity market themes of the past few years — outperformance of momentum strategies.
Citi's economists continue to see a world of low/modest/disappointing GDP growth in 2016-17. Additionally, they acknowledge downside risks, primarily from China, to their modest forecasts. If this plays out, then it is likely that momentum strategies will continue to perform well within the equity market. This report looks at where investors should be positioned currently on this basis.
Why is this a strategy for idiots? Because, as the "heatmap" below shows, all you do is go long the green and short the red and pray it works. Rinse. Repeat.
As we said, a "strategy" for idiots.
Thank you Ben and Janet for forcing all of us to become idiots if we want to make any money in your "market."
