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Past performance is no guarantee of future results.
Which economy will grow faster this year: the euro zone or the US? Which central bank will surprise markets the most? Fund managers spend a lot of time debating these issues and their implications for asset classes in different regions.
But in fact, there hasn’t been much divergence in economic and monetary cycles for some time. As a result, differentiating between countries hasn’t really helped drive investment performance, with share price moves dictated more by individual companies’ earnings.
In this environment, we believe there are much better opportunities for alpha generation to be had from looking at asset allocation by global sector rather than by region. Both our market analysis and the attribution of our own portfolio returns support this view.
The average 12-week dispersion of returns within the MSCI All-Country World Index – the extent to which returns differ from the mean – shows that stocks are behaving more according to which sector they are in, on a global basis, rather than to which country or region (see chart). Indeed, this trend has been in place for much of the past three years.
Furthermore, the quarterly rolling correlation of share price returns among different regions is hovering around its long-term average. Correlation between sectors, in contrast, has been heading lower and now stands at just 52 per cent – meaning sector indices move in tandem with each other only around half the time – versus the long run average of 69 per cent.
Dispersion of returns among industry sectors compared to return dispersion of regional equity markets, expressed as ratio
Source: Pictet Asset Management, Datastream. Data covering period: 02.07.1998 – 14.06.2018, using constituents of MSCI All Countries World Index, 12-week average
So, if sectors are the way to go, the next question is which ones to pick? We believe energy and materials currently offer attractive opportunities. We also like technology for the long-term growth potential, particularly in robotics and the digital economy. Conversely, we are fairly cautious on utilities.
Of course, economic and policy divergences may yet re-emerge. In the US, for example, there is support for Reagan-style supply side reform: lowering taxes in a bid to increase total budget revenues. It is hard to see such policies being passed in Europe, where strict EU rules necessitate greater control over public debt. The rise of populism can play a part in triggering divergences as populist parties are more likely to follow non-conventional agenda or focus on domestic priorities. That would lead to greater dispersion of returns and lower correlations in the performance of their respective stock markets.
For today though, sectors are in the ascendancy, and active managers have the opportunity to use this in asset allocation decisions to maximise returns.
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This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
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