What’s driving The Great Rotation?

Livewire Exclusive

Livewire Markets

Q: What’s been driving the rotation out of smaller ‘growth’ names?

What we saw was a preponderance of large and mid-cap fund managers to chase alpha in this space. A weight of money came in, and so long as these companies were delivering earnings upgrades, they didn't really focus on valuation. They went; "Okay. It's delivering earnings upgrades. I'll buy it. It's going up."

We have an approach that focuses on the underlying valuations, and they seemed to get very stretched. The trigger point for that was prior to the US election; the realisation that interest rates were bottoming and going to go up. As that became more of a concern, the valuations started coming into play.

The relative out-performance of banks and resources was starting to draw the focus some of those larger fund managers, who started saying to themselves; "Well wait up. I'm suffering from (under)-performance because I'm not in those stocks. Maybe the game is up, here in smalls and mids, maybe it's a little bit over cooked, and I need to start that rotation back."

Q: What’s changed with regards to the availability of credit?

It's not too discernible at the moment that credit availability is drying up. There's no credit crisis. It’s just that the delta* on the availability of credit is going to change. Instead of being very easily available, very loose credit conditions, it will start to tighten up. That starts then influencing a lot of risk taking because people will start to think; "Well, this riskier stuff that I was buying, because I could get access to this really cheap credit… Maybe I need to reassess the risk-return balance, and these things aren't as attractive."

We're not seeing any signs of real concern. Now in that, in China in the last week or so the government's trying to tighten up availability of lower quality credit. There's been an increase in the number of Chinese corporates that are defaulting when they've gone into offshore markets in the last year. These are some of little signs we’re seeing.

The higher cost of the credit will potentially drive earnings downgrades to companies who've benefited from the low credit costs inflating their asset values and increasing their ability to raise dividends because the interest costs on those inflated assets are lower.

* Delta. The ratio of the change in price of an option to the change in price of the underlying asset. Also, called the hedge ratio. Source: (VIEW LINK)


Livewire Exclusive brings you exclusive content from a wide range of leading fund managers and investment professionals.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.