Quality is Ruling Pretty Much All Areas of this MarketFebruary 09, 2016
As markets narrow amid stress in the commodities and banking areas (see our recent post on the narrowness of markets) we wanted to point out that there has been one saving grace for equity investors, which is quality companies. In all but two sectors (energy and materials), owning the highest quality companies has significantly helped performance. In health care we haven’t seen much difference between high and low quality and in telecom there are no high quality names (chart 1).
When we break out the distribution between DM and EM, we notice the same thing, namely that high quality has outperformed low quality by a large margin, especially in the EM (chart 2).
We measure quality on a percentile scale of 0-100 based on a combination of balance sheet, income statement and cash flow measures, with 100 representing the highest quality. Here we’re defining high quality companies as companies in the 80th percentile for quality or higher. In the charts below the high quality companies are represented by the orange bars and the low quality companies by the blue bars.