Value and momentum crossover looms into view; Small-caps double up for canny buyers
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Gathering momentum
As the UK nears 12 months since its first lockdown, it’s worth recalling that the date coincides with equity markets’ recent nadir. As unlikely as it may have felt this time last year, risk assets had already touched their lows by the time the full closure of UK businesses was announced on 23 March.
So all that bad news will soon fall out of the one-year statistics – and some think this moment will prove more than a quirk of the calendar. Analysts at Bernstein think this shift could form the basis for a ‘holy grail’ moment for value stocks, when such shares effectively become both value and momentum plays.
Global value indices hit an eight-year low in late March last year, and have rallied ever since. The 12-month anniversary is important, according to Bernstein, because this is the time period used by many quant models to screen which momentum shares to buy. That implies some additional buying could get underway in the coming weeks.
For everyday investors, the prospect of such shares being associated with momentum screens will be rather less enticing. It might imply the rally has got ahead of itself – and Bernstein’s data hints at something similar.
The number of stocks that screen as both value and momentum plays is already at the highest level since 2016. Just as significant is that these crossover moments tend to be pretty brief: its dataset, stretching back to the 1980s, provides little evidence of this trend persisting for more than a few months.
For those interested in calendar effects, there is another coming up in a few weeks: as Bloomberg notes, 6 May will mark the value shares’ low point versus their growth and momentum peers. But these are strange times, and few would be able to confidently assert just how long the current rotation will persist.
Low-hanging fruit
In sterling terms, the Russell 2000 index is now up a neat 100 per cent over the past year. The larger share of this gain actually came prior to the vaccine news of early November – and as we’ve reported previously, many DFMs were already adjusting their portfolios accordingly.
Not all those shifts were positive ones. The team at Premier Miton, for example, sold out of Hermes Smid US Equity just weeks before the vaccine bounce, on October 15, saying the fund “hasn’t done too much wrong for us…but it hasn’t really done too much right, either”.
They’re unlikely to have rued that decision too much, having redeployed money into other holdings like Legg Mason US Small Cap Opportunity, the very best performer in the IA North American Smaller Companies sector since last November.
Others tapping the small and mid-cap rally have proven similarly astute. The most popular pick in this part of the equity universe – THB US Opportunities – is second only to the Legg Mason fund in performance terms over the past four-and-a-half months.
But nor will those whose selections have lagged the index feel too bad about it. With small-cap indices having doubled, and mid-cap benchmarks up 75 per cent in sterling terms, those whose selections have ‘lagged’ are still sitting on sizeable gains for the past year, or even the past six months.
Irrespective of what comes next, simply having small-cap exposure of any kind has proven the right move: this was fundamentally an asset allocation rather than a fund selection call.
That may change from this point onwards: as money pours in, it may be that the easy gains have already gone. Then again, many said the same things about tech stocks on more than one occasion over the past half decade. As with the value shares mentioned above, making such calls is almost impossible to get right. As a result, most allocators will likely stick with their even-handed approaches for now.
Trading up
The retail investor boom continues to make itself felt in the UK as well as the UK: an unscheduled update from Hargreaves Lansdown this morning saw the platform state that its full-year profit is likely to be ahead of expectations.
Here, as across the Atlantic, the boom is pretty focused on US equities: Hargreaves said it had continued to see “elevated volumes of share dealing” since the end of January, with “an increased proportion of these directed towards international equities, driven by interest in US stocks”.
How this trend plays out from an industry perspective is, as we’ve said before, an open question. Will it ultimately lead to structurally higher levels of interest in investment – however much the current craze is driven by trading rather than long-term time horizons? Or will it fade away once life returns to ‘normal’? Wealth managers playing the long game will hope for the former – and/or be considering ways to convert that interest into something more relevant to their own business models.
