Mihir Worah: When we’re trying to construct and build out the equity portion of our portfolio, what we want to be overweight, what we want to be underweight, overall positioning, there’s three things we look at.
One is where we are in the profit cycle, are profits likely to go up or go down? The second is, we do a deep dive into style and factor-based investing, how different factors perform at different stages in the business cycle, and the third thing we look at are the geographic indices.
Geraldine Sundstrome: In a slowing, yet still growing environment, we favor overweight high quality defensive sectors in equities. This still has performed relatively well so far this year. Where do we stand now?
When looking at a model for EPS growth in the next few months and quarters ahead, we sadly see no inflection point. Profits are likely to remain flirting with recession level.
In terms of factor and style mapping, the same remains true. In this environment, we would favor quality, but also momentum, while still stirring away from value and cyclical sector, and also we would favor larger cap over small caps.
Mihir Worah: And the third thing we look at is, geographically, are different country indexes, how are they exposed to these factors, where are they in the business cycle?
Erin Browne: What's really interesting is that when you dissect the equity markets on a country by country basis, you realize that there's fairly distinct factors that drive markets.
Across the US it tends to load very highly to both the quality and the momentum factor. Whereas an example, across Japan it tends to load most highly towards the value factor.
As a result of this, we can overlay our style mapping to our country exposures. And what this tells you, is that we should be overweight the US and underweight some of the more value oriented factors which really load to both emerging markets as well as to Japan.
Mihir Worah: The key takeaways for equity investing right now is you want to be high quality. That’s hard to come by at this stage in the cycle. Value does well when you have a cyclical recovery and people buy cheap stocks, because everything is growing. When growth is hard to come by, you want to be up in the quality factor, and in parts of the world where you’re actually getting that earnings growth. This is not a time where you can be blindly exposed to equity markets everywhere across the world, all sectors, all regions. It’s a time to be selective.
Recorded 4 September 2019
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