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Quality Shines Again

Alfred Lee

Quality Shines Again

  • This year’s annual Federal Reserve Jackson Hole Symposium came and went without any surprises. The main focus of chairman Jerome Powell’s speech was that the Federal Reserve (the Fed) would be shrinking its emergency asset purchase programs at some point this year. While the Fed’s last tapering of quantitative easing in 2013 largely caught the market off guard, the U.S. central bank has been more transparent this time around, so as not to disrupt the market and more importantly, the economic recovery.
  • Since Jackson hole, the U.S. yield curve has so far remained relatively unchanged. This is partially due to growing concerns around the Delta variant and the disappointing U.S. payroll numbers, which may cause the Fed to delay tapering. However, it should be noted that the pace of asset purchases is no longer suited for the current economic environment, which has come a long way since the spring and summer of 2020.
  • While interest rates in the U.S. haven’t moved up, the decline that we saw during spring and early summer has stabilized since the July Federal Open Market Committee (FOMC) meeting, where the majority of Fed policy makers agreed that emergency asset purchases should be reduced.
  • The Fed has stated that it plans to leave its overnight rate unchanged. The U.S. central bank can further manipulate the shape of the curve by targeting the pace of tapering for specific parts. This would help reduce the amount of disruption we saw in the 2013 taper tantrum; however, it is likely that investors will have to revisit their current equity portfolio and reposition to areas that are less affected by the imminent taper.


U.S. 10-Year Yields Stabilize After the July FOMC Meeting

Source: Bloomberg, September 6, 2020-September 6, 2021.


Trade Opportunity:

  • The quality factor may be well positioned in a tapering environment. Investors should also keep in mind that markets will always react in advance. The MSCI Quality indices screen stocks for three specific metrics:
    • High return on equity (ROE): this measures the profitability of a business, in relation to its equity, or in other words, how many dollars of profit are generated per dollar of shareholder equity. This metric is intended to screen for “winners."
    • Low earnings variability: companies with predictable and consistent earnings are seen as less risky.
    • Low financial leverage: businesses that don’t rely on debt are likely to be more stable, especially if interest rates increase or economic conditions deteriorate.

By screening for these three metrics, investors are left with a portfolio of blue-chip stocks that have competitive advantages in their specific industries and exhibit defensive-growth characteristics.


Quality Stocks Start to Rally Relative to Global Stocks

Source: Bloomberg, September 8, 2020-September 6, 2021.

Alfred Lee

Quality Shines Again

  • This year’s annual Federal Reserve Jackson Hole Symposium came and went without any surprises. The main focus of chairman Jerome Powell’s speech was that the Federal Reserve (the Fed) would be shrinking its emergency asset purchase programs at some point this year. While the Fed’s last tapering of quantitative easing in 2013 largely caught the market off guard, the U.S. central bank has been more transparent this time around, so as not to disrupt the market and more importantly, the economic recovery.
  • Since Jackson hole, the U.S. yield curve has so far remained relatively unchanged. This is partially due to growing concerns around the Delta variant and the disappointing U.S. payroll numbers, which may cause the Fed to delay tapering. However, it should be noted that the pace of asset purchases is no longer suited for the current economic environment, which has come a long way since the spring and summer of 2020.
  • While interest rates in the U.S. haven’t moved up, the decline that we saw during spring and early summer has stabilized since the July Federal Open Market Committee (FOMC) meeting, where the majority of Fed policy makers agreed that emergency asset purchases should be reduced.
  • The Fed has stated that it plans to leave its overnight rate unchanged. The U.S. central bank can further manipulate the shape of the curve by targeting the pace of tapering for specific parts. This would help reduce the amount of disruption we saw in the 2013 taper tantrum; however, it is likely that investors will have to revisit their current equity portfolio and reposition to areas that are less affected by the imminent taper.


U.S. 10-Year Yields Stabilize After the July FOMC Meeting

Source: Bloomberg, September 6, 2020-September 6, 2021.


Trade Opportunity:

  • The quality factor may be well positioned in a tapering environment. Investors should also keep in mind that markets will always react in advance. The MSCI Quality indices screen stocks for three specific metrics:
    • High return on equity (ROE): this measures the profitability of a business, in relation to its equity, or in other words, how many dollars of profit are generated per dollar of shareholder equity. This metric is intended to screen for “winners."
    • Low earnings variability: companies with predictable and consistent earnings are seen as less risky.
    • Low financial leverage: businesses that don’t rely on debt are likely to be more stable, especially if interest rates increase or economic conditions deteriorate.

By screening for these three metrics, investors are left with a portfolio of blue-chip stocks that have competitive advantages in their specific industries and exhibit defensive-growth characteristics.


Quality Stocks Start to Rally Relative to Global Stocks

Source: Bloomberg, September 8, 2020-September 6, 2021.

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