Growth and value trends

Continued divergence and convergence in 2016:

Volatility in commodities, corporate bonds and money market instruments are currently high/very high compared to long term averages. Broad stock markets indices have rather normal volatility currently. Further divergence between growth stocks and value stocks, services vs manufacturers and DM vs EM markets increase the risk of corrections.

Divergence

Since the bottom of the financial crisis (Feb 27th 2009 – the month end at which the MSCI World was at its lowest since pre-crisis), growth stocks have outperformed value stocks in all regions except the pacific - and also globally[1].

The trend of DM outperforming EM accelerated in 2015, but what is equally important is that global services continued to diverge from global manufacturers through 2015 until March 2016 from which we saw a reversal to “bricks and mortar investing”, which may continue through 2016.

Divergence then convergence:

Corporate profit margins are generally converging – unfortunately downward. European margins have fallen since 2010 but also US margins fell through 2015 reversing the high levels from 2010-2015. EM margins have collapsed 50% since 2007 due to both lower productivity growth and higher wages and this started before the China slowdown. The only major exception is Japan reflecting a shareholder friendly shift in Japanese corporates.

Convergence:

The last small increase in EM margins seen in the right hand chart above (MXEF) is so far temporary and the convergence towards S&P margins may be that both move downward in 2016. Same for Europe vs Japan where corporate profits is partly helped from the Abenomics policy inducing a generally higher activity level.

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[1] All graphs are in local currencies. We see that especially in the Nordics and for the Pacific rim as a whole the burst of the dot.com bubble (growth companies) hit growth investors the most. The difference at present has been increasing like pre the dot-com