Last week, SocGen’s Andrew Lapthorne announced that he had discovered “the most depressing chart ever!” (The exclamation point was in the original.)
The chart showed the percentage of global developed and emerging market stocks that have beaten the S&P 500 on a total return USD basis over one and two years.
Considering we live, trade and invest in a world defined by what Howard Marks famously described as a “perpetual motion machine“, Lapthorne’s conclusions weren’t entirely surprising. Out of 16,000 stocks, just 22% of them have managed to beat the S&P over the last two years.
Fast forward to this week and Lapthorne is out with a sequel of sorts.
“The point is not to criticize active management per se, but to highlight that the S&P 500 is not particularly representative of the average economic performance of the average company”, he writes, in a Monday note.
He goes on to make an important point that speaks to how many consensus trades (e.g., Long Momentum/Min. Vol. versus Short Value/Cyclicals) are tethered to the “slow-flation” narrative, creating a setup that’s conducive to the type of multi-standard deviation factor rotations that played out in early September and, to a lesser extent, early last month.
“Part of the problem stems from the type of bull market we’ve seen, i.e., one driven by valuation changes and a search for relative safety”, Lapthorne writes, noting that “investors have dramatically de-rated cyclical risk and are paying a premium for lower risk/higher growth assets”.
Generally speaking, larger companies are higher quality stocks, and when you throw in the appetite for Growth names and the fact that success breeds success courtesy of, for example, certain winning sectors and names becoming synonymous with multiple factors and thereby benefiting from inflows into products based on those factors, you end up with the circular dynamic described by Marks.
(SocGen)
In any event, Lapthorne goes on to say that from a valuation perspective, this has created ostensible opportunities. Specifically, he says his team has located “1,000s of stocks trading on less than 10x forward PEs”, and although “they’re not as profitable as the biggest firms, they are ‘cheaper’”.
The problem: You’ve got to be willing to “take on liquidity risk”. And that’s somewhat taboo.
