Sector movers: Quality names to keep underperforming

28th Oct 2013 14:42

Before the financial crisis, and the technology bubble which culminated in the 2000 stock-market crash, mean-reversion was considered by many to be one of the most orthodox investment thesis. Simply said, over a long enough time horizon on average shares would tend to overshoot or undershoot their fundamentals and then 'revert' to their 'theoretical' valuations, or so the thinking went. Then came along the two successive stock market crashes, first in 2000, and then again in 2007/08, the latter of which - in particular - broke that cozy tendency of stocks to 'revert', as historical correlations broke down,leading to not just a bit of panic amongst many market participants and especially the more "quantitative" types out there. Nevertheless, there are now those who believe such patterns are re-asserting themselves and expect them to continue to do so. Thus, on Monday strategists at Nomura wrote to clients telling them that: "The past three months has seen high-risk stocks outperform high-quality ones. There are signs of upgrade fatigue setting in among analysts covering high-quality stocks. We retain our long Risk and short Quality stance."Define quality"Quality is most overweight Consumer Staples and, to a lesser extent, Consumer Cyclicals (eg, luxury). Risk is relatively most overweight Financials (especially Banks and Asset Managers), with overweight positions also in Tech (eg, hardware) and Autos."So what might one of those high-quality consumer cyclicals be? InterContinental Hotels Group to name one (it was Monday's worst performer throughout most of the session). Another Quality name, and stand-out faller on Monday, was Tullow Oil. These shares' falls today did not lead to the the largest sector moves on the market, but it may nonetheless be worth pointing out that there may have been more to them than at first meets the eye and why. Lastly, Nomura points out that "quality names" have returned -9.8% in terms of long-short returns since July 1st, versus +12.7% for "risk names." Yet that only undoes a small part of the premium multiple that high-quality stocks still demand, the broker explained. "So the valuation spread between these styles remains close to a 25-year high. We think that this will mean-revert and provide impetus for further outperformance of Risk over Quality for some time (at least a year)". Top performing sectors so far todayPharmaceuticals & Biotechnology 11,410.51 +1.36%Food Producers & Processors 7,128.87 +1.00%Tobacco 38,113.34 +0.65%Beverages 14,985.60 +0.64%Chemicals 10,163.80 +0.64%Bottom performing sectors so far todayAutomobiles & Parts 8,512.90 -2.18%Industrial Metals & Mining 1,525.78 -1.80%Forestry & Paper 11,859.27 -1.26%Real Estate Investment & Services 2,678.98 -1.04%Technology Hardware & Equipment 1,143.38 -1.00%