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A knockout 2016 for blue-chip momentum

Following a quiet start to the year, a late surge in the second half has seen my blue-chip momentum screen clock up its most impressive year-on-year performance since late 2010
December 7, 2016

The allure of a classic momentum strategy (buying the market's fastest rising shares in expectation that they'll continue going up) is not the prospect of being first to the party, but rather getting to the party early enough to still enjoy a good portion of the fun. The past year has provided a great illustration of this dynamic in action. And this has ultimately resulted in an excellent 2016 for the long portfolios selected by my blue-chip momentum screen, which I run every three months based on selecting the previous quarter's 10 best-performing (the longs) and 10 worst-performing (the shorts) FTSE 100 shares.

At the start of 2016 the revelry in the FTSE 100 was not being experienced by the market's past winners (the longs). In fact, the best share price performance was coming from the market's recent losers (the shorts) as resources stocks rallied hard following a savage multiyear mauling. Indeed, while the longs chosen by my blue-chip momentum screen modestly outperformed the markets during the first six months of 2016, it was the shorts that stormed ahead. Indeed, when I updated the screen in June, the relative performance of the shorts compared with the longs was a matter of consternation.

However, one of the virtues of tracking momentum is the existence of reams of academic research that suggests the strategy will outperform as long as it is stuck to through both good and bad times. So it has proved the case this year and the final six months of 2016 have seen the longs enjoy a phenomenal run as the rally by the market's erstwhile dog stocks has become a sustained recovery.

Meanwhile, the establishment of new, sustained negative trends in the market caused the screen's shorts to underperform the market once more. Indeed, the table below showing the performance of the strategy over the past three months looks something of a textbook outcome, and enhances the cumulative long-term performance of the strategy since I started monitoring it in 2007 (see chart).

 

LONGSSHORTS
NameTotal return (15 Sep 2016 - 5 Dec 2016)NameTotal return (15 Sep 2016 - 5 Dec 2016)
Glencore 53%Marks and Spencer2.8%
Anglo American 46%Royal Bank of Scotland0.9%
HSBC 8.8%Lloyds Banking0.5%
Smiths 5.0%Int'l Cons. Airlines0.0%
CRH 3.9%Taylor Wimpey -1.3%
Mondi 0.0%Berkeley-2.5%
InterContinental Hotels-0.5%British Land-5.9%
Coca-Cola HBC-4.8%Land Securities-6.5%
AstraZeneca -19%easyJet -9.3%
Fresnillo -31%Travis Perkins -15%
Longs6.2%Shorts-3.6%
FTSE 1004.9%-4.9%

Source: S&P Capital IQ

 

Capital onlySince Inception (15 Jun 2007)5 years3 years1 year
Longs125%78%25%30%
FTSE 100-2.0%22%1.7%11%
Shorts-9.2%39%18%25%

 

Blue-chip momentum

 

The combined return from the last two very strong quarters for the momentum longs is a substantial 27.6 per cent. The only time the blue-chip momentum strategy has put in a better six-month showing was the 79.7 per cent it delivered in the second and third quarters of 2009, when equity markets were rebounding sharply from credit-crunch lows. What's more, on a year-on-year basis, the strategy has not performed as well as it has in the past 12 months (both on an absolute basis and relative to the index) since the final quarter of 2010.

 

Year-on-year performance

 

The extent of the longs' recent outperformance in part reflects how extremely skewed the market has been to a few key themes. Indeed, over the past three months two sectors (resources and financials) have done almost all of the running and the longs had exposure to both. Indeed, only a third of the FTSE 100's constituents outperformed the index over the past three months and only 30 per cent of the shares in the index experienced a price rise. What's more, of those rising shares, 70 per cent come either from the resources or financial sectors (see pie chart).

 

Where outperformance is coming from

 

The concentration of outperformance in relatively few parts of the market has been characteristic of year as a whole, too. In fact, financials have only relatively recently joined the party and for most of 2016 the rich pickings have come from an even thinner selection of stocks: namely resources plays that have benefited from the recovery in the prices of metals, and oil and gas.

Only 36 FTSE 100 stocks have outperformed since the start of the year, and a quarter of those came from the resources sector. Put another way, nine of the 10 resources stocks included in the FTSE 100 at the start of the year outperformed. What's even more significant, though, is the extent to which these stocks have outperformed the rest of the market. The stats for the year to date are quite staggering on this front, with resources stocks producing a median capital return of 50 per cent compared with -3.7 per cent from all other blue-chips. Based on the unweighed average, the situation looks even more extreme, with FTSE 100 resources stocks producing average capital upside of 87 per cent compared with -3.0 per cent from other stocks (see table). Momentum's value during this period has been to get in on the action in the resources sector, and to bet big.

 

1 Jan 2016 - 5 Dec 2016MedianUnweighted average
Resources50%87%
All FTSE 100 constituents-2.3%5.9%
Non-resources-3.7%-3.0%

Source: Thomson Datastream

 

This quarter's momentum picks represent the continuation of this trend of outperformance by resources stocks. The new theme of outperformance by the financial sector is also represented. Much of this comes down to the recent rise in bond yields across the world from anaemic levels. This generally boosts the profits of financial companies such as banks and insurers. While the trend began before the US presidential election, the victory of Donald Trump has spurred on this trend in the bond market due to the view that the new president's economic agenda is likely to prove inflationary and will force the Fed to finally start on a sustained round of interest rate increases. For UK-focused investors, much of the significance of this is based on a view that where the US leads, the rest of the developed world is likely to follow.

Aside from resources and financials, the long momentum picks include a homegrown recovery story in supermarket giant Tesco, and a company that is expected to be a big beneficiary of increased American infrastructure spending, US-focused equipment hire group Ashtead. The full list of longs and shorts are in the table below. Due to timing issues with the publication of the magazine, these lists are based on performance data up to 5 December. Future updates of this screen will be based on portfolios covering performance for a full three-month period to 15 December and vary from the lists below.

 

LONGS

NameTIDMPriceMarket cap3-month momentumNTM PEDY*
Glencore GLEN278p£39.5bn42%24-
Anglo American AAL1,209p£17.0bn36%12-
Antofagasta ANTO694p£7bn34%350.7%
BHP Billiton BLT1,304p£69.4bn33%171.7%
Rio Tinto RIO3,006p£54.1bn31%144.8%
Barclays BARC213p£36.1bn28%120.9%
Ashtead  AHT1,535p£7.6bn28%151.5%
Tesco TSCO207p£16.8bn27%24-
Royal Dutch Shell RDSB2,152p£201.3bn27%--
Prudential PRU1,561p£40.1bn26%122.5%

 

SHORTS

NameTIDMPriceMarket cap3-month momentumNTM PEDY*
Capita CPI542p£3.6bn-18%85.8%
Fresnillo FRES1,198p£8.8bn-14%261.1%
Polymetal Int'lPOLY747p£3.2bn-11%85.5%
Mediclinic Int'lMDC685p£5.0bn-11%161.2%
Randgold Resources RRS5,825p£5.5bn-10%200.9%
Hikma PharmaHIK1,666p£4.0bn-8.9%161.5%
AstraZeneca AZN4,055p£51.3bn-8.7%135.4%
Whitbread WTB3,410p£6.2bn-8.5%142.6%
Imperial Brands IMB3,396p£32.2bn-6.8%124.6%
Travis Perkins TPK1,369p£3.4bn-6.3%113.2%

Source: S&P Capital IQ