There's One Technical Reason That Can Save the Global RallyBy
Fourth quarter tends to see momentum factors outperform
Tech stocks, Turkish equities, high yield bonds in focus
’Tis the season for fund managers to ponder their performance this year as they report returns to clients. This may spark a flurry of “window-dressing,” where the year’s best-performing assets are added to portfolios as the end of the fourth quarter draws near.
“Such window-dressing tends to lead to momentum factors showing the best performance in the final quarter,” HSBC Holdings Plc analysts Volker Borghoff and Kai Boecker wrote in a note. Commerzbank strategists Stephan Appelhans and Max Kettner also suggest investors playing catch-up may add juice to this year’s favored trades in coming weeks.
With that in mind, here is a quick reminder of the hot trades of 2017, which analysts project may offer more gains yet:
For momentum watchers, Turkey, Hong Kong, Poland and Hungary are among the best-performing stock markets in the world this year, all showing a rise of over 20 percent. And even after a near 40 percent gain, Istanbul’s bourse has upside of about 12 percent, according to analyst price targets, whereas Polish shares are seen as closer to fair value. In the U.S., the Nasdaq trades about 12 percent below its target, despite a 25 percent gain this year. For investors comfortable with geopolitical risks, South Korean stocks offer 20 percent upside, even after a 25 percent gain in 2017.
In terms of sectors, it is of course all about tech. Technology shares are the best-performing sector in the MSCI World Index this year and their 36 percent return is three times the average of the other industry groups. Still, analysts remain bullish and their target offers about 9 percent upside. Basic materials have also performed strongly and even after a 20 percent rise this year, the sector offers a further 8 percent upside, according to target prices. For the contrarian investor, telecoms have the biggest potential gain after lagging most this year, with 16 percent upside to target.
Momentum seems to have turned against the top performers this month as investors pull money from junk bonds and yields tick higher in emerging-market debt. Those sectors have outperformed the rest of the fixed income market this year. However, for junk bonds at least, the selloff has been concentrated in lower-rated categories, with better quality debt holding firm.
Copper has been a star performer in the commodity world in 2017. The orange metal has climbed amid robust Chinese demand and as some of the biggest mines suffered production interruptions. However the rally has brought it above forecasts, as is the case with Brent crude oil. Gold has also risen above forecasts but analysts see further upside for silver, despite its year-to-date gains.
— With assistance by Todd White