James Clunie, Head of Strategy, Absolute Return
Is it sensible to buy the dip?
Markets slumped in the last week of February, but the Growth vs Value valuation spread actually widened further, explained James Clunie, Head of Strategy, Absolute Return. In the history of Growth vs Value spreads, we’re now in the 100th percentile, so it’s very extreme! Even when you’re in the 100th percentile, it can of course get even worse, and that’s what has happened.
What will change this Value vs Growth dynamic? While it’s hard to predict what the catalyst will be, James said, something usually does come along to change it. Fiscal spending is just one potential catalyst for change for this market dynamic, and we are already seeing a number of countries (including Japan and Russia) working on fiscal proposals. We will have to wait and see what the UK decides to do too. Real-world spending on infrastructure projects, for example, would certainly create an environment for Value to outperform Growth.
So, is it sensible to buy the dip? James said that usually, if you look at the history of outbreaks like this, it has made sense to buy the dip. In his own strategy, James has been covering some short positions and adding to several long positions.
However, he said the coronavirus outbreak could alternatively be seen a different way: with high asset prices and record-high global debt levels, we have a fragile asset price system, and any significant shock could break that system. This view would make the outbreak much more important than just a virus. It is impossible to be certain which view is right. Most people James has spoken to do believe it’s time to buy the dip, but ultimately only time will tell.
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