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Stock Market Report - Time For Stock Pickers To Shine - Citi UK

11 September 2017Equities
Stock Market Report - Citi UK

For most of the current 8-year bull market, conditions had favoured passive investing. With central banks set to reduce their balance sheets, rising market volatility may finally give active investing an opportunity to shine.

  • As the equity bull market continues into its eight year, Citi analysts tell us that for most of this bull market, share prices were moving together. This implies that stock pickers had limited opportunities to outperform. At the same time, stock dispersion was low, which means that the difference between the top performing and bottom performing stock was small. Hence an investor may not be richly rewarded for picking the right stock but neither would he be severely punished for picking the wrong one.
  • This phenomenon is also true for sectors. To illustrate, in March 2000, the difference between the 6-month returns of the top performing technology sector and underperforming consumer staples sector was 75%. As of August 2017, the difference between the 6-month returns of the top performing technology sector and underperforming energy sector is only 20%.

Dispersion between Global Sectors

  • Citi analysts believe that central banks' asset buying program is largely responsible for the high correlation and low dispersion environment. During periods of high stock correlation and low dispersion, passive investing tends to fare well. This may have helped reinforce the strong inflows into passive funds seen over the last few years.
  • However, changes are afoot. Citi analysts note that stock correlations have been falling. Going forward, Citi analysts believe that dispersion may rise as central bank tapering lifts equity market volatility. As correlations fall and dispersion rises, stock pickers are likely to find more opportunities to outperform, allowing active investing to shine again.

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