Those engaged in active quantitative equity should focus on keeping a balance between four key forces — value, sentiment, quality, and risk, according to State Street.
According to Olivia Engel, global chief investment officer, strong performance in one or more of these areas could justify maintaining a position in a crowded trade, even when performance was weaker in other areas.
“Staying ahead of the shift from greed to fear is not easy (although finding a way to do so will only become more important as global liquidity adjusts to a more normal environment). Greed periods often last a long time, as the market steadily prices in information. But fear takes shape quickly,” she said.
“In general, crowded trades exhibit a relationship between ultra-high sentiment, poor value, and potentially falling quality.”
“By taking a holistic view of these key market drivers, we strive to reap the rewards of crowded trades while staying ahead of the potential shift to fear.”
Starting with the marine transport industry, which saw a rise of 215% this year and was topical in light of Australia, Engel said State Street’s model continued to favour these stocks from a sentiment and quality perspective but less so from a value perspective – and market risks were rising which required monitoring.
While in the world of semiconductors, which had already risen 62% in 2021 and was waiting for the construction of further factories, Engel said the firm’s models continued to support trading in this space because of highly favourable quality and sentiment scores.
And in the Chinese consumer discretionary space, which fell 13% this year, Engel said State Street was opting to not become a buyer as valuation metrics for most of these stocks were still twice that of the overall MSCI China index.
“At the margin, this segment is certainly getting less crowded, but valuation metrics for most of these stocks are still twice that of the overall MSCI China — especially the large-cap names that are under regulatory scrutiny. We like the China consumer growth story, but prefer names in the less crowded, small-cap segments that offer better valuation and better near-term fundamentals”.
