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Rotating market leadership
Market leaders tend to rotate after a recession and enjoy a multi-year period of outperformance. The GFC ushered in a decade of real asset underperformance vs financial assets (proxied by commodities vs bonds), which has reversed after the lockdown recessions.
Similarly, info tech and consumer discretionary heavily outperformed vs energy and banks during the QE/financial repression of the last decade, which has also started to reverse.
The shocks associated with recessions often result in large shifts in the policy environment, causing shifting market leadership as business models shift and adapt. The pandemic brought with it aggressive and coordinated monetary and fiscal policy stimulus, which was last seen in World War II.
This suggests the current change of market leadership towards inflation assets has legs.One long-standing market leadership trend that has not reversed after the pandemic is US equity outperformance vs the rest of the world. US outperformance over the past decade has been linked to the upward re-rating of tech valuations. The decomposition of log returns for the S&P and for the software sector shows the remarkable and continued contribution of multiple expansion as a key driver of returns since 2012 (gray area in charts).
Investors should beware of the implicit duration exposure of equity portfolios to rising yields, which is likely to bring about the end of secular multiple expansion that has driven tech outperformance for the past decade.
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