Global Equity Spotlight Episode 14

Hello everyone, and welcome back to Global Equity Spotlight, a series where we delve into interesting topics affecting equity markets. Today, I have Jacques and Cornelius joining me. Thank you for being here. So, Cornelius, let’s kick off. We’ve seen markets reaching all-time highs along with the momentum factor performing really well. Could you maybe unpack that for us?

Yes, we think there’s two main factors driving this. The first one is the increased retail participation in markets. It’s never been as easy to buy options on the various platforms like Robinhood and Interactive Brokers, and there’s a massive appetite to buy leveraged ETFs these days. So you’ve seen leveraged ETFs increase by sixfold since 2020. You are now seeing even a company like SK Hynix up more than 800% over the last year. You’re now seeing the launch of two times SK Hynix performance. There’s a DRAM ETF which tracks the largest memory players, and even there you see a two times leveraged ETF on DRAM. So this is creating a lot of leverage in the market, and you see the banks and counterparties needing to chase these share prices up to service the delta of these options and the ETFs.

And then you also have the hedge fund pod shops, where they are very focused on protecting downside because they can’t afford negative months. So they always try to lean into winning trades in the short term. So you’re now seeing record positioning on a net and gross level in semiconductors, and exposure in software being at all-time lows because it is seen as a sector that’s being disrupted by AI. So the whole AI buildout has created very concentrated pockets of the market on a sector and stock basis, and the momentum is just very strong.

Fantastic. Thank you. And Jacques, how is that impacting how we are navigating markets at this point?

So the momentum factor is very strong as Cornelius mentioned, and it means you need to be more conscious of the momentum factor in the portfolio. As a reminder, we are always overweight quality, value, growth, and momentum, although momentum overweight is less than the other factors. And it means that the current environment isn’t as favorable to our style, but you need to adapt to the prevailing conditions, which means you don’t sell your winners as quickly and you don’t buy into some of the stocks that have lagged as quickly. I think what’s interesting is the big divergence that we are seeing in companies and in baskets of shares where companies seen as AI winners are outperforming by bigger margins, while companies seen as AI losers are underperforming again by big deltas. I think this will bring both risk and opportunity for us. Risks being that you get into stocks too quickly that have lagged, and you sell out your winners. I think once this big divergence closes in the future, it will bring very attractive opportunities for us to capitalize on.

That sounds really exciting. Thanks, Jacques. To the audience, thank you so much for joining, and we look forward to seeing you next time.