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Taking Stock of The Recovery

Raphael Fiorentino
2nd December 2019 - 3 min read

Three things happened since our September note when we observed the possible emergence of a recovery trade in Developed Markets (see Go Bottom-Fishing Like It’s 2016 Again?):

  1. The stock-picking environment has normalised for North America equities but has improved in Europe and Japan
  2. The DM recovery trade that started in late August has continued to play out, most markedly in Japan
  3. Our global macro indicators may be rolling over, when a transition to “upcycle” conditions looked only days away

Return to normality for the North American equity market

Compared to last summer, the percentage of (trailing 3 months) outperformers in North America dropped from an attractive 63% to a “normalised” 50% (see screenshot from Butterwire’ s Markets section below), while the returns skew from a random stock draw dropped from over +2.5% to under +0.5%. Conversely, European and Japanese markets have seen their breadth and skew improve materially since global growth expectations bottomed out last August.

Breadth & Skew

Recovery stocks have been the outstanding outperformers of the past 3 months

Against this backdrop, recovery stocks have been playing a highly supportive role. As a reminder, recovery scores are calculated for the bottom 20% performers in each region (based on trailing 12-month excess return); the highest recovery scores are attributed to stocks with the best combination of high (downcycle) base score, low fitness, and low momentum scores, and so helps surface “bottom-fishing” opportunities at times of (expected) market recovery.

Recovery stock example

Outside of EM, a third of all recovery stocks have outperformed over 3 months, delivering returns of +4% to +8% above average.

Recovery Returns

Furthermore, over a third of all recovery stocks in DM have outperformed by over +15% (up to 4 times more than non-recovery stocks), while not even one-sixth have done worse than -15%.

Extreme Returns

Global macro indicators losing momentum?

Since 2005, there has been 3 main periods of recovery:

  • Early 2009 (whose effect extended well into 2010 as depleted supply chains were being restocked)
  • Early 2012 (abruptly interrupted by the euro-debt crisis)
  • Early 2016 (following two false starts in early and late 2015)


In each case the recovery started following a low point in iGDP of well under -1.5% and took hold as iGDP went shooting past the +4% mark. Conversely, markets experienced only a small dip into negative iGDP territory last August, and current iGDP looks like it might just be on the verge of rolling over from its recent high of +3.5%, perhaps in anticipation of the new US tariffs on Chinese in December. Monetary liquidity expectations have also experienced a sharp momentum reversal after a short bounce in October in response to the Fed’s $20bn bond purchase. If confirmed, the recovery of late 2019 might be done by the time we get to 2020 as we revert to the same “downcycle” conditions we’ve been experiencing since mid-2018.

Top down drivers

Addendum: Performance of the 40 stocks listed in Go Bottom-Fishing Like It’s 2016 Again?

Stock Performance