Rising Margins benefit Value and Quality
Corporate margins have been recovering strongly. Macro indicators such as the PMI Diffusion indicators and the Frankfurt airfreight data point to continued strength. However, there are risks from increased supply and corporate tax reforms. Interest, Tax and Minorities as a percent of Sales have fallen over the last 30 years, but this is likely to come to an end. The impact of margin recovery on Factors is important to watch, therefore. The decline in margins of Cheap stocks in 2018 and the expansion of margins of Expensive stocks helped drive the rotation out of Value. However, the margins of Cheap stocks have recovered to the same level of Expensive stocks. The narrowing of margin differentials also removes some of the attraction for High Momentum stocks. In Quality, the difference in margins of High and Low Quality stocks has expanded to the widest in 15 years due to the rise of the Cashburners.