In the 35th week of 2023, the S&P 500’s Top 25 by momentum outperformed the S&P 500 index (+4.49% vs +2.50%).
Most of the top gainers were tech stocks, which had a dramatic effect on the Top 25 list of the tech-heavy Nasdaq 100, which outperformed the Nasdaq-100 (+5.79% vs +3.67%).
Given that both tech as well as broad market valuations have been positive, the overall reaction might be that recessionary fears have passed and its business as usual. However, much needs to be addressed in terms of overall market health, the assumed balance between Developed Markets (DM) and Emerging Markets (EM) and investor behaviour.
Falling Correlations, Rising Volatilities
In a study published in the last week of August, Boston-based GMO (also known as Grantham, Mayo, Van Otterloo & Co. LLC), a Boston-based asset manager with a contrarian investing and generally bearish approach and around $60.8 billion in Assets Under Management (AUM), noted that its Systematic Global Macro (SGM) portfolio – which invests in equity markets around the world – has witnessed equity markets dropping in correlation since COVID.
The study goes on to examine market correlation in pairs when both markets were up and when both markets were down (with pairs wherein one market was up and the other was down being excluded on account of their resulting negative correlation). The result: on average, equity markets are 5% more correlated on « down-market » days than on « up-market » days.
To examine the impact of business cycles on market correlations, the market returns were again paired wherein both markets were either in an upward economic cycle or a downward one using each country’s PMI indicator. The results were quite consistent with those from the up- and down-market regime lens: when both economies were expanding, the correlation between markets was substantially lower – a full 10% on average – than when both markets were contracting.
This leads to a general rule of thumb with regard to market correlations:
“As either markets or economic cycles shift from negative, to mixed, to positive sentiment, one can generally expect equity market correlations to decline.”
However, while market volatility has generally been trending downward toward long-term averages, the VIX index has been drifting into the high teens. Since lower correlations may also mean greater breadth, there are more differentiated return streams to choose from and significant valuation dislocations in equities – with some of the pricing differences at historic highs.
Investor behaviour has also been contributory factors behind these dislocations.
Retail Flows, Tech Highs
As per trading platform Public, which released its « Retail Investor Report » in the last week of August, U.S. retail investors across platforms set a new all-time high for weekly inflows in February 2023, with $1.5 billion pouring into the market in a single week.
The report also included a survey of platform users on a wide range of topics. Salient points of interest were:
59.9% of respondents were either positive or neutral about the economy while 40.1% were pessimistic.
19% of respondents are already using AI to power investment research.
16.4% say that social buzz is an « important buzz » in their decision-making.
The survey also indicated a surprising return of preference for an equity class that had diminished in the years of headlong rush into growth narratives: dividend-driven investing themes emerged as the most interesting strategy in the second half (H2) of this year.
Dividends are generally paid out by companies with stable earnings pass-through capability and enshrined market share status. These typically tend to be classified as « value » stocks and not « growth » stocks. Also, dividend stock investors tend to hold for long periods and in relatively large volumes in order to collect dividend payouts. It will be interesting to see how this affects trading volumes and the resultant high valuations created by said volumes.
A sustained beneficiary of buzz has been AI stocks: AI thematic ETFs saw a 34% YoY increase in new retail investors in H1 2023 and AI stocks comprised 14% of the Top 50 stocks by Page Views on Public’s platform. In contrast, buzz doesn’t always translate to flows: net investors in top EV ETFs shrunk by 2% from January to August.
AI has been a favoured theme even in private markets. While Q2 has seen a drop relative to Q1, funding trends are running on par with Q4 with deal volume increasing.
While current trends in deal volume lag behind that of the past year, the net value of deal flow is poised to exceed last year’s level.
Deal flows typically precede IPOs by a number of quarters or even years. While IPO pricing levels are gaining relative to last year, they’re nowhere close to decade-high 2021 levels.
Overall high tech valuations have been a matter of concern for institutional investors in the Year Till Date (YTD). In Bank of America’s Fund Manager Survey for August 2023, the consensus among survey respondents representing 211 fund managers with $545 billion of AUM was that their portfolios’ tech allocation is the most overweight, i.e. over-represented in returns relative to their weight, since December 2021.
Bank of America-owned Merrill Lynch highlighted a key weakness in valuations in the last week of August: the ongoing subsidies race between the U.S. and China has triggered a global sprint with European Union countries, Japan, Canada, the United Kingdom and others offering their own subsidies and incentives to attract capital investment.
The past five years, in particular, could be seen as the first stage of the nearing end of « globalization » wherein a select few companies will be the predominant source of key technologies. The global subsidies race is spurred on by national security concerns as opposed to profits. Thus, the global marketplace will soon be awash in subsidized semiconductors, electric batteries, solar panels and other goods that are produced locally. As a result, the supply chain efficiencies, trade flows, global earnings growth and profit margins of numerous firms are poised to be hammered.
Also affecting market breadth is the fact that U.S. Treasuries – a one-time spoiler for skyward US equity valuations until the tech bubble in the final decade of the past millennium – have been rising in nominal yields under the current rate hike cycle and offering a favourable path of risk-adjusted returns.
Overall trends indicate that AI-driven pile-ons into tech will likely be causing volatility in US equity markets while global growth outlook is affected as the world continues to seek fragmentation due to economic security concerns. While it’s certainly not true that tech would decline per se, the fact remains that they’re far too overvalued in terms of prospective addressable market size.
In terms of market breadth, it’s pretty much a buyer’s market for the discerning investor with the requisite reach. A wide variety of equities from around the world are increasingly attractive while bond markets offer strong risk-adjusted alternatives to earnings. The estimated return of a classic – dividend-driven investing – proves how valuable periodic coupon payments are proving to be in driving investor choices. The same reasoning applies towards the increasing favourability of bond markets and another disquieting factor for equity valuations.
All in all, it pays to stay well-researched, diversified and be wary of singular growth narratives.
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Violeta a rejoint Leverage Shares en septembre 2022. Elle est chargée de mener des analyses techniques et des recherches sur les actions et macroéconomiques, fournissant des informations importantes pour aider à façonner les stratégies d’investissement des clients.
Avant de rejoindre LS, Violeta a travaillé dans plusieurs sociétés d’investissement de premier plan en Australie, telles que Tollhurst et Morgans Financial, où elle a passé les 12 dernières années de sa carrière.
Violeta est une technicienne de marché certifiée de l’Australian Technical Analysts Association et est titulaire d’un diplôme d’études supérieures en finance appliquée et investissement de Kaplan Professional (FINSIA), Australie, où elle a été conférencière pendant plusieurs années.
Julian a étudié l’économie, la psychologie, la sociologie, la politique européenne et la linguistique. Il possède de l’expérience en matière de développement commercial et de marketing grâce à des entreprises qu’il a lui-même créées.
Pour Julian, Leverage Shares est une entreprise innovante dans le domaine de la finance et de la fintech, et il se réjouit toujours de partager les prochaines grandes avancées avec les investisseurs du Royaume-Uni et d’Europe.
Oktay a rejoint Leverage Shares fin 2019. Il est responsable de la croissance de l’activité à travers des relations clés et le développement de l’activité commerciale sur les marchés anglophones.
Il a rejoint LS après UniCredit, où il était responsable des relations avec les entreprises pour les multinationales. Il a également travaillé au sein de sociétés telles qu’IBM Bulgarie et DeGiro / FundShare dans le domaine de la finance d’entreprise et de l’administration de fonds.
Oktay est titulaire d’une licence en finance et comptabilité et d’un certificat d’études supérieures en entrepreneuriat du Babson College. Il est également détenteur de la certification CFA.
Sandeep a une longue expérience des marchés financiers. Il a débuté sa carrière en tant qu’ingénieur financier au sein d’un hedge fund basé à Chicago. Pendant huit ans, il a travaillé dans différents domaines et organisations, de la division Prime Services de Barclays Capital à l’équipe de recherche sur les indices du Nasdaq (plus récemment).
Sandeep est titulaire d’un master spécialisé en finance et d’un master en administration des affaires de I’Institut de technologie de Chicago.