He said the behaviour of investors at the moment shows clear signs of a tactical trade rotation, rather than the larger and more strategic shift in long-term asset allocations from bonds into equities suggested by the concept great rotation.
The current regulatory environment limits the flexibility of insurance companies and pension funds in terms of asset allocation, L’Hoir added, and do not provide much scope for increased exposure to risk assets.
To get around this institutional investors rotate from large cap into small cap equities, prefer value stocks over growth stocks and cyclical sectors over defensive sectors.
L’Hoir said the same happened in 2009 without triggering a corresponding great rotation.
“We believe investors should consider including global small caps in portfolios to diversify equity exposure and benefit from the on-going trade rotation in small caps with a preference for the US.
“Avoiding exposure to single style, whether growth or value, and instead adopting a selective approach straddling both value and growth universes,” he said.
On a country level L’Hoir pips for overweight emerging Asia and some European countries such as Germany, as “emerging Asia usually outperforms during trade rotation periods”.
