On BalanceThoughts prompted by the Apollo signal product
Since we ‘called the bottom’ for the sector as you can see from the blog comment on April 14 and the Apollo Margin of Safety chart, the SX7P has rallied from €140 to €157 (12%) but as of today, the sector has not only come back to value (the Apollo FV for the sector is €157.35) but broken above that level and the upper boundary of the FV range.
The Travel sector entered the re-rating phase on January 10 and since then the good news has just kept coming. When Factor risk changes you need to know especially when accompanied by our idiosyncratic signals of momentum and volatility (Accelerator and Risk Adjusted return signals). This combination forms the basis of our Smart Alpha strategy and why it works as well as it does. For as long as the sector is re-rating and there is an Acc long signal you know you are in a good place and when it changes, the dynamics of the stock / sector / market change.
The story of this sector has been one that demonstrates perfectly the Apollo Investment Cycle as we have seen the move from Value to Re-rating and Growth. We now have a group of low volatility Re-rating and Growth stocks – otherwise known as Quality and as we look at the group today we see the majority showing Accelerator Long signals to fully support the investment case that investors have been buying into.
What we witnessed was the market re-rating the sector, taking it from trading at extreme discount to FV in October 2022, to trading at historically high premium in late February / March 2023 – an extraordinary re-rating to a point where red flags in the form of the Apollo Risk Adjusted Return signals were appearing.
Outside of Banks the clues at a stock, sector and market level that give guidance to investors as to what to do or not do right now are few and far between. Both the S&P 500 and Stoxx 600 are no longer in the re-rating phase of the Apollo investment cycle and that points to more volatile times and as a consequence many sectors have transitioned from Re-rating to De-rating or Value
The consequence of recent events (SVB) meant that the market had to reconsider the discount rate being applied to future cash and the repricing meant the sector has come back to the Orange line – FV. A moment that we call ‘back to value’ – zero premium to present value so surely an opportunity to buy?
For years now we have been extolling the obvious virtue of knowing where value is at any point in time – looking at the expected returns and the discount rate being applied to those cash flows.
In the Spring of 2022 European Banks started to generate Accelerator long signals, slowly but surely, one by one until the sector itself lit up in a green tinge from April – June and here we are today coming out of a positive earnings season, seeing the sector re-rating.
So, when asked the question ‘Why did you own BP?’ you point at the image of the Apollo Investment Cycle. Answering the more difficult question, ‘Why did you not own BP during the last 2 years ?’ That’s more awkward.
At Libra we think differently and deliver the best user experience for Active equity investors applying the years of experience and understanding that we have in equity markets. We not only know what information is going to make a difference to client performance but provide the best experience.