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Go Bottom-Fishing Like It’s 2016 Again?

Raphael Fiorentino
Raphael Fiorentino
20th September 2019 - 2 min read

The Feb-16 to Jul-16 period was the last time that “Recovery” stocks outperformed the market (and spectacularly so). Until now.

20th January 2016: global equities are down -12% after posting losses for 15 consecutive trading days. 15 trading days ago, Butterwire’s iGDP (a measure of global growth expectations as implied by the pricing of highly liquid securities including treasuries, bonds, commodities, currencies, equities, derivatives and proprietary composite indices) had dropped into recessionary territory, suggesting a defensive positioning, away from equities with low “Recession-resilience” scores (recession resilience scores are derived from a stock’s fundamentals and sensitivity to iGDP).

The decline of iGDP started to reverse on 21 January, almost entirely thanks to movements in the pricing of US Treasuries. A recovery seemed to be taking hold and by the end of February Butterwire’s engine started to suggest that “Recovery scores” were now most interesting to consider. Recovery scores are only assigned to the worst performers within a region and score levels are again driven by stock fundamentals, albeit with a higher emphasis on value. It was “Bottom Fishing” time and the performance of this category of stock over the following 6 months was spectacular. For instance, the median excess return over the following 6 months for the top 15 recovery scores in EU +29%. The hit rate was 93% (EdF was the only underperformer in the list).

Global Growth Expectations

20th September 2019: the 517 stocks with a recovery score as of 20th August have outperformed their regional benchmark by +6.2% over one month. The hit rate is 71%. Excluding Emerging Markets (EM) stocks, the excess return averages +8.3% and the hit rate stands at 77%. Could it be Bottom-Fishing time again?

Returns

Drilling a bit into the data (which you can download in the “Tools” section of the Butterwire platform), the outperformance is even stronger in Developed Markets (DM) when excluding Banks (BK) and stocks from the Healthcare (HC) sector (9.8% outperformance, 82%). In EM, Financials with recovery scores continue to behave “as normal” with terrible returns and hit rate (-12.8% and 23% respectively).

Returns Breakdown

Here are screenshots of the top 10 recovery scores by region (excludes stocks with red flags or alerts), which you can find in the Explorer section of Butterwire:

North America

North America

Europe

Europe

Japan

_Japan_

Emerging Markets

Emerging Markets

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