Unlike the previous two months, quality stocks lost money on a net basis— i.e., in a long short portfolio—in April.
Unlike the previous two months, quality stocks lost money on a net basis— i.e., in a long short portfolio—in April. We had pointed out early last month that the acceleration in outperformance from quality may have been a signal of the maturity of the then ongoing drawdown in stocks.
Growth stocks generated mildly positive results in April, a trend we have been seeing for several months now. The clear winning styles in April were momentum (the stocks with maximum 12-month returns and those with the highest positive deviation from their respective 200 daily moving average (DMA), what the buy side was buying, high valuations (high PE, PB and low dividend yield), high beta and high financial leverage. If that does not smell and feel like a bull market, very little will.
Value factors continue to lose money just like in February and March. High beta and momentum have been winning strategies over the past 12 months. Following the consensus, both the sell- and buy sides have also been fruitful. Our analysis shows momentum styles do not lose money in bull markets and the reversal in the fortune of momentum factors in April may be a signal that this market may have more legs. We certainly look forward to see how May unfolds.
Growth’s sustainable comeback
Since India’s growth recession began in 2010, value has worked better than growth. Quality stocks also did very well during this growth recession. Growth should be distinguished from quality, even though there are stocks that straddle these categories. The former is change in return on capital; the latter is about the level of return on capital.
Trends of the past 15 months suggest growth stocks are making a comeback —indeed the market is detecting a new growth cycle and seems willing to back a nascent recovery in the performance of growth styles as a more sustainable outcome. We think this outperformance of growth over value (and quality) will continue in 2018.
There are four ways to participate in growth—companies with strong trailing capex, robust trailing book growth, strong trailing positive earnings revisions or the best forward revenue or EPS growth. Our strategy, as it has been over the past several months, is to back growth at a reasonable price (GARP). The risk to this view is that if the growth cycle falters, it could lead to a bounce back from quality and value stocks. Our favorite GARP stocks include: Bajaj Auto, Mahindra & Mahindra, ITC, Reliance Industries, MMFS and JSW Steel.
Edited excerpts from India Equity Strategy report by Morgan Stanley
By Ridham Desai