A rotation away from value stocks and into quality names has already begun, claim analysts at broker Liberum Capital.
Quality investing is a strategy based on identifying stocks that display consistent operating and financial characteristics over many years.
The ability of management to run a business very well and make good decisions in good times and bad is a typically ‘quality’ assessment, while high scores on financial metrics such as profit margins, return on capital employed, return on equity, cash conversion tend to feature.
A value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales.
Such companies are typically cyclical in nature so they come in and out of fashion, offering investors to chance to buy into this valuation gap before it closes over a period of months or years.
RIGHT ON TIME
‘In our Annual Outlook in January, we anticipated value to outperform in the first half of this year with a rotation into quality in the second half,’ said Liberum’s analysts.
The team believes that this rotation ‘seems to have started in the second half of June’ with quality stocks starting to perform really well and value underperforming growth.
‘As we expect temporary weakness in equity markets in the third quarter 2021 and the Fed and Bank of England potentially announcing a taper, we think that quality stocks with high profit margins and/or low leverage should be the outperformers in the second half.’
CRUNCHING THE NUMBERS
According to Liberum’s analysis, during June the cheapest stocks by price to earnings have underperformed the most expensive ones in the US, UK and Europe by 0.6% to 1.6% compared to an outperformance in May.
Liberum says that quality stocks, as measured by high return on equity have outperformed stocks with low return on equity by 0.6% to 1.1% in June after mostly underperforming in May.
‘We think this shift from value into quality in June was only the beginning of a trend that will likely persist for the second half of this year before we expect another rotation back into value in 2022,’ added Liberum.
