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Equity Strategy


Equity Strategy Team

Charles Cara
Head of Quantitative Strategy
Philip Isherwood
Global Sector Strategist
Richard Mylles
Political Analyst
Zahra Ward-Murphy
Global Equity Strategist

Equity Strategy Research

Equity Strategy Products: Absolute Strategy Weekly, Equity Strategy Quarterly, Trade Alerts.

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Global Strategy Update - Quality and Earnings as Macro hits peak surprise
23 Mar 2017
: Philip Isherwood, Charles Cara, Zahra Ward-Murphy

Our pillar core views are pro-Quality and Earnings delivery. Our 3 Major Overweights all combine positive Earnings profiles, higher Quality and lower B/S risk with a recent de-rating. And, as macro surprise peaks, we move U/W in Autos & Parts, Travel & Leisure and Basic Resources joins Oil & Gas. But it’s not ‘all about Cyclicals vs. Defensives’: like Utilities, Insurance is lower Quality and joins it as Major Underweight, and Health Care is cut to Neutral. The Quality story is there: the Earnings one isn’t.
* PODCAST: Click to hear Phil’s accompanying podcast

Macro Beta: Neutral - allocated framework weight 0%
Our Activity Surprise Indicator and PMI Diffusion Indicators pointed to strong macro momentum. But we may be nearing the best of the growth acceleration, as activity surprise has peaked. As the reflation narrative gets tested by policy delay and lack of detail, for now, we neutralise the Macro Beta pillar in our framework process.

Relative Valuation: modest positive – allocated weight 10%
High overall Equity market valuations suggest some focus within the market on relative cheapness: low valuation is a protection against event risk and market risk. We do have a positive weight of 10% on relative valuation in our process. But, for now, we believe that Quality and Earnings delivery are the key characteristics.

Forward Earnings: Positive – allocated weight 40%
We are not in a growth-rich world: we anticipate a near-term improvement in EPS growth, but 12m fwd expectations are likely to be disappointed. We allocate a 40% weight to our Earnings pillar, which checks growth with revisions and EPS Surprise. Delivery, not promises, matter if growth underwhelms and EPS uncertainty rises.

Balance Sheet Strength: modest positive – weight 10%
Low profits growth and uncertainty act to highlight balance sheet risk. But potential bankruptcy risk doesn’t guarantee disaster. Recessions are the trigger for mass corporate default, and our 6m probabilities are sub-10%. Quality and Earnings delivery provide protection. For now, we weight Balance Sheet Strength at 10%.

Quality: Positive – allocated framework weight 40%
A backdrop of macro surprise peaking, uncertain EPS growth and rising funding costs promotes persistent cash flow generation and higher debt comfort. Quality is an obvious way to protect against risk, while the relative valuation of Quality is now unstretched. Quality as a characteristic will command a premium: pillar weight 40%.

Sector recommendations: they reflect broader ASR views
Our Sector recommendations have a more Defensive tilt. This chimes with other ASR tenets: that Macro momentum is to fade; a more selective view on reflation; bond yields to rise, but modestly; and incipient credit and market risk. Change is possible, but the realpolitik is that it’s difficult to engineer and harder to deliver.

ASR Equity Strategy: Global Sector recommendations & changes

Watch: Global Strategy Update - Quality and Earnings as Macro hits peak surprise
Investment Strategy Weekly Update - 16th March 2017
16 Mar 2017
: Dominic White, Raphael Olszyna-Marzys, Michael Hessel, Ben Blanchard, Charles Cara, Philip Isherwood, Zahra Ward-Murphy, Chris Turner, Stefano Di Domizio, David McBain
Watch: Investment Strategy Weekly Update - 16th March 2017
March edition of ASR's CIO Pack
13 Mar 2017
: Charles Cara

Attached is the March edition of our CIO Pack. It summarises the macro and the market environment.  We highlight 10 charts from the ASR research team for the month.

• One of the challenges facing investors today is to gauge to what extent the new US Administration represents a change in macro regime. This matters for policymakers; it also matters for strategic asset allocators.

• It is too early to say whether the Trump Administration represents a regime change. We are watching four key tripwires:
   1. Will 10yr US Treasury yields rise above 3%?
   2. Is policy changing beyond USA so that Global ERPs break out of their trading ranges?
   3. Is there evidence of institutional change?
   4. Are there microeconomic changes that support the idea of a macro regime shift?

• Regime change seldom comes mid-cycle and may only become apparent coming out of the next recession.

• So investors waiting for the ‘Great Rotation’ into US Equities and the end to the 30 year bull market in US Bonds, have a problem.  Current equity valuations are too high (Shiller PE is 27x & ERP at 3%). The rotation into equities that started in the early 1950s equities began with when the US Shiller PEs was 10x and the ERP at 10%.

• Although equities will likely beat Bonds in the next decade, it is likely that the ‘Great Rotation’ into any new investment regime will only start following greater clarity about the new policy regime and lower equity valuations, following the next recession.

Investment Strategy Weekly Update - 9th March 2017
9 Mar 2017
: Dominic White, Raphael Olszyna-Marzys, Michael Hessel, Philip Isherwood, Zahra Ward-Murphy, Charles Cara, Dorothee Deck, Chris Turner, Stefano Di Domizio
Watch: Investment Strategy Weekly Update - 9th March 2017
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