Global equity markets rose strongly during the third quarter of 2012, as investors recovered their appetite for risk courtesy of the worlds’ central bankers. Asset prices reacted positively across the globe in response to a third round of quantitative easing by the US Federal Reserve and a vow from the European Central Bank to tackle the Eurozone debt crisis.
In order to better understand the interaction between economics and investor sentiment, Reliance Asset Management Malaysia evaluates companies in terms of investment ‘styles’, such as Value, Growth and Momentum. This analysis forms the basis of ‘Cognition’ our in-house stock selection model. The following ‘heat map’ of global style preferences tallies the number of sectors where analysis by Cognition over the past twelve months assigns a greater than equal weight to any given style (red being ‘hot’) against those where it assigns a less than equal weight (blue being ‘cold’).
Although ‘Financial Strength’ clearly remains a ‘hot’ investment style, the number of sectors favoring ‘Value’ has increased markedly in the US and Europe. Investors continue to prefer companies with strong balance sheets in most economic sectors across the developed world, but they are now increasingly attracted towards those offering the best relative valuation.
Turning to look at the changes in style preferences during the third quarter of 2012, we note a clear divergence in style trends at the regional level. Greater risk appetite in the US, Canadian, UK and European markets contrasts markedly with a lower risk appetite in Asia – ‘Value’ preferences remained static in Asia and actually fell in Japan. It is worth noting that the export dependent Japanese economy has not yet recovered and we believe it will only do so when global economic growth begins to accelerate. The style differences are a good demonstration that recent equity market gains have been driven by liquidity rather than any real improvement in the global economy.
Reliance Asset Management Malaysia is Investment Manager of the WSF Reliance Global Shariah Growth Fund. This fund utilizes the Cognition investment process.