Research Affiliates on ‘the trade of the decade’
Factor manager Research Affiliates appears to be charging in where value managers are still nervous to tread, with a big call on the state of global markets and where the main opportunity lies – UK equities.
Mike Aked, Research Affiliates’ director of research for Australia, said last week (March 17) that the firm had identified and notified clients in 2016 a “trade of the decade” as emerging markets equities. In the subsequent two years, emerging markets returned 80 per cent, against the MSCI World Index’s 45.9 per cent. The RAFI (Research Affiliates Fundamental Index) EM-tilt return was 85 per cent.
“Today, emerging markets trade at similar valuations,” he said in a series of presentations. But UK equities, and particularly value segments, will be the next “Trade of the Decade”.
Aked said that a trade of the decade only happened in a recession, with September 30, 2020, after which value stocks enjoyed the kind of spurt that has been rare since the global financial crisis, a “good date” to give the end of the “first truly global recession of the modern post-War period”.
The end of last September was when the US and Australia started their recovery, which we were also now starting to see in Europe, but not yet the UK or emerging markets, he said.
“We’re now in a period where the US is recovering strongly and in Australia we’re returning to normal. But Europe is still building. When we see markets do well, we will see small caps and value do well.”
As of last week, there was a positive 10–15 per cent rise of value over the market, and indices were now positive across the board. A lot of the outperformance tended to come in the first six months of a recovery. There was an alignment of value, the market and small caps driving the rally.
“It’s rare to see cheap valuations, positive price momentum and a global recovery coming together as now,” Aked said. “Value investors are usually fighting the Fed. Now, they have the support of the global economy.”
While the momentum factor works for all combinations of stocks and many portfolios that are correlated with economic cycles, most of the time the value factor faces negative momentum. The times that value has a momentum tailwind are fewer than for growth, but when they happen, they are very strong, Aked says.
“The strongest period of performance is in the recovery phase,” he says. If Research Affiliates is right about the date for the end of the global recession, investors have about 18 months to take advantage of the trade of the decade.
While the UK suffered more intense headwinds than many countries going into and during the worst of the impact of the pandemic, post-Brexit and with a strong vaccination response, it is enjoying better tailwinds.
These include: resolution of much uncertainty around Brexit; opportunities for the financial sector, such as Swiss shares trading moving to London; the ability potentially to be more nimble on regulation; and, applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free-trade pact that represents a market of around 500 million people.