Investors should focus on alpha
Global equities investors should focus on idiosyncratic alpha rather than relying on momentum or passive beta as market volatility is expected to continue over the coming months, Antipodes Partners says.
Additionally, the combination of accelerating growth and tepid inflation experienced in 2017 would not repeat but instead the normalisation of interest rate policy would create the environment where the markets would become “more volatile and less forgiving”.
According to Antipodes, there were only two likely scenarios where in the first one growth would continue to surprise, forcing central banks to normalise their policy, while under the second scenario the growth would be more disappointing due to policy tightening by China and the US.
In the first case, to minimise disruption to short-term funding markets, tapering would likely focus on the long end of the yield curve leading to a potentially self-reinforcing pro-growth steepening, resulting in an increase in bond volatility.
In the second scenario, credit volatility would spike, triggering a major sell-off in credit-sensitive equities regardless of their duration, leading to a repeat of the 2015/16 commodity high yield meltdown which ended up spilling into non-commodity exposures.
“Given the divergent risks that the above two scenarios represent, investors should focus more than ever on uncovering sources for idiosyncratic alpha rather than relying on momentum or passive beta,” the firm said.
“In this sense, we’re encouraged by the high level of valuation dispersion within and across markets (region/sector/factor) as indicative of broad pragmatic value opportunities, both long and short.”
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