What caught my eye?v.68,Is it time for quality,growth or value?

In the latest issue we discuss the key investor concern. Are quality, growth,value or other styles likely to provide better returns over the next twelve months?We believe investors are facing a year of binary outcomes and similar tomystical experiences (you either believe them or you do not) there is very littlemiddle ground. The key to ‘healthy reflation’ is the belief that private sector haslargely recuperated and only needs a slight ‘nudge’ by public sector to recaptureits ‘animal spirits’ and start to multiply aggregate demand, allowing public sectorand monetary accommodation to gradually withdraw. However, as discussed(here), there is no evidence that private sector in any of the key economiesrecovered, and reluctance to invest dates back decades. For example, nonresidentialprivate fixed-asset investment in the US had been sub-par for morethan 30 years, and in most countries, private sector savings remained elevatedfor years. There is also considerable evidence that investors reside in a world ofexcess capital, declining return on investment, deglobalization and populism.

If fiscal and supply-side reforms do not improve private sector productivity (andwe maintain there is no chance of that) and thus do not alter natural growthrates, any significant fiscal stimulus is far more likely to cause greater inflationarypressures rather than augment real growth, with rising interest rates thenderailing growth and returning these economies back to disinflation. This is thechallenge that the US is likely to face. Alternatively (as in China), it could causegreater overcapacity and reignite strong deflationary pressures. Anotherchallenge is that if global fiscal and monetary policies are not coordinated,changes in spending and inflationary outcomes could cause significant anddisruptive currency shifts (particularly US$, Rmb and ￥). In a de-globalizing worldwhere public sector aggressively utilizes ‘bully pulpit’ (‘name and shame’) andemerges as direct participant rather than merely a facilitator, investors are alsolikely to witness growing reliance on tariffs, anti-dumping duties and restrictionson capital flows. Whether attempting to move back long-departed supply chainsor forcing private sector to invest in projects that it otherwise would rather avoid,it is likely that economies are gradually moving towards ‘closed gardens’,penalizing global growth, EMs and small/open economies.

What investment style would be preferred as cross-currents of fiscal spending,promise of supply-side reforms, de-globalization and vocal state sector are offsetby retreating monetary activism? As discussed in our preview (here), it isunlikely that key asset classes would be unidirectional (does anyone rememberhow consensus was deflationary only six month ago?). There is low probabilitythat any administration can offset well-imbedded secular stagnationpressures that were building over the last several decades. Technology andoverleveraging are deflationary, whilst states and people are pushing back tryingto reflate. This fight would go on for years, but technology and debt wouldultimately win. However, there could be periods when investor perception couldswing in an opposite direction (as it is now). This implies that unless publicsector eliminates bond and currency market constraints and becomes far moreaggressive, disinflationary pressures would return. 2017 is likely to be a yearwhen mildly positive fiscal policies would collide with private sectors’ reluctanceto spend and monetary policies becoming tighter. In this environment recentcyclical/value outperformance is likely to eventually fade, before growthand quality return. Indeed, our Asia ‘Quality Sustainable Growth’ portfolio iswithstanding pressure and is outperforming benchmark and its quality variant.