European Quant Strategy: Style Investing: 5 Signals the Quality Trade is About to Turn.

Research evidence excerpt

European Quant Strategy: Style Investing: 5 Signals the Quality Trade is About to Turn.

ow 50% of the inputs that are signaling a ‘Contraction’ which Consensus Global EPS Revisions (%) Rising

is a change from 17% a year ago. Over the same time horizon, the inputs Figure 2: Low vs. High Quality Performance

signaling a ‘Recovery’ have dropped from 50% a year ago to 17% today. & Money Supply Growth

• 5 Reasons to Go Long Quality, Short Junk.

Having taken risk off the table last month, we now see the Low vs. High Quality

rotation as imminent, with Quality set to grab the baton. High Risk has already

started responding to shifting market dynamics, but Quality has yet to

meaningfully rotate, leaving the trade with ample room to run. Five signals line

up behind the call: 1) Global Equity Sentiment slipping toward negative; 2)

Money Supply Growth the 'lead indicator of the lead indicators' peaking; 3) the

Quality-Momentum rank correlation mean reverting, so tomorrow's Source: J.P. Morgan Global Quantitative Strategy, MSCI.

momentum winners should be more Quality focused; 4) an elevated Low vs.

High Quality EPS revisions spread poised to act as the fundamental driver

Figure 3: Price Momentum - Drawdown

behind this rotation; and 5) Financials ceding ground to Health Care, Style Contributors

historically the leading edge of a Quality inflection. We stay comfortable with

the call: Long High Quality, short Low Quality.

• Momentum Drawdown.

Momentum is the best long-run style provider, it works, until it doesn't. Despite

frequent Momentum reversals over the past year, this month felt different:

Long Momentum fell sharply while Short Momentum rallied, squeezing the

trade from both sides. The pain appears global: Japan led the unwind at -20%, Source: J.P.