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Arnout van Rijn (AR): Every time you said, “Well, US market is a little bit expensive here. Let's take some money off the table,” then that was the wrong call. Especially when you had that swoon in August and then another small one in September. It was like, “okay, this is the big one right now. The overvaluation is unveiled to the rest of the world, and US equities will start to underperform.” No it didn't.

Welcome to a new episode of the podcast.

Erika van der Merwe (EM): Equity markets are living through one of the most powerful momentum runs in decades, driven in large part by the continued dominance of US large cap equities. But with valuations soaring, the question is can the winners keep on winning or will the momentum train soon lose steam? The momentum factor seems to reward market trends, may flummox value based investors and keeps contrarian investors on their toes.

In this show, we take a look at why this factor has been so strong and what might come next. My guest for this discussion are Michiel Plakman. He's lead portfolio manager for Sustainable Global Stars, and Arnout van Rijn, who's portfolio manager in Robeco’s sustainable multi-asset team. Welcome. I'm thrilled to have the two of you here in the studio with me. Thank you for joining.

Both: Thank you.

AR: What a crowd.

EM: Well, let's start with the basics. What do investors mean when they refer to momentum or the momentum factor? Michiel.

Michiel Plakman (MP): In principle, they speak about price momentum, right? That's what people think of when they speak about momentum. Obviously there's much more to momentum. There's also revision momentum earnings momentum itself. But when investors speak about momentum it's usually price momentum.

EM: So what is a momentum stock. I don't know.

AR: It's when more and more people start to take an interest and therefore yeah there's more buyers than sellers. And then the price keeps going up. It doesn't really often mean that the narrative is completely changing, but it just means that more and more people are buying. So valuations are expanding.

EM: So the root of all of this is behavioral finance, human behavior, overreaction.

AR: Yeah, definitely. There's a human error sometimes. But the real issue with momentum is that you need to side with potentially erroneous behavior of investors in order not to lose your shirt, because it can last a very long time. And so you need to – for me, as a value investor, it's more about protecting yourself from not betting against the momentum too much.

EM: Exactly. And that's the point. It's been such a powerful factor over the decades if you look at academic research on it. So investors ignore it at their own peril. But now looking just at the past year, why has momentum been so strong, Michiel, over this more recent period?

MP: Well, one of the things is I think that fundamentals have been in line with momentum, right? So there was also a good reason to – for large cap names that are winning to continue winning. Second is there's just been an influx of money, right. So liquidity, which is a very important underlying factor for that explains why momentum works has been very, very good in the market, especially since the Fed started cutting rates again in September. But if you look all year, momentum has been very, very strong, but also very much aligned with the specific group of names that have been particularly driven not just by my momentum but fundamentals as well. But of course, it's more powerful when the two work together.

EM: Yeah. Arnout is that your assessment? You look at equities but in fact you look at all asset classes. So what are your perceptions then of what the drivers have been?

AR: It’s feeding upon itself, it seems because to me, it's been a bit scary to – sitting in our weekly market meetings where we discuss what's going on. And here there's a tendency to just focus on equities. But when you talk about markets, financial markets in general, over the last 12 months, the factor momentum has come more and more to the fore in our team's discussions. You don't want to bet against the momentum because every time in 2023 and also in 2024, we did a decision that was going against the momentum. It was proven to be wrong.

So you've been, for instance, thinking of it for a long time already, “well the US dollar needs to fade, it's overvalued, it needs to at some point come down.” So every time we took a position against the US dollar, that turned out to be wrong. And similarly with what Michiel was discussing when that happens to equities too. Every time you said, “Well, US market is a little bit expensive here. Let's take some money off the table,” then that was the wrong call. Especially when you had that swoon in August and then another small one in September. It was like, “okay, this is the big one right now. The overvaluation is unveiled to the rest of the world, and US equities will start to underperform.” No it didn't.

EM: It sounds as though it must go against the grain. It must be really difficult on a daily basis to manage your portfolios of perhaps your common sense tells you this market or this stock is overvalued, and yet you have to keep holding or being overweight. Michiel?

MP: Well, it's a combination, right? You need to look at all your factor exposures. So momentum is one. It's not the only one. But clearly and to be frank, I think that this is something that is more present today than maybe five or ten years ago. It is definitely the case that as a fundamental investor as well, you need to be very momentum aware. That is I think very important.

EM: Michiel, in your explanation of why momentum has been so strong, you refer to this trend that's driven a narrow group of stocks, much of which has been the Magnificent Seven stock. So do you own these in your portfolio?

MP: Yes, we do.
EM: All of them?

MP: We own all of them. Not all of them are overweight. So we have a neutral overall exposure I would say, underweight some, overweight others. But in principle, yes, we do own all of them.

EM: So what does that decision look like? Does it feel a bit the way Arnout described it, in your mind? “These stocks, it doesn't make sense. They look too expensive right now but the market's moving. You have to be on the train.”

MP: To be frank they're not all created equal. So there's names in the Magnificent Seven that still have pretty good valuations. There's also ones that are overweight –those are the overpriced; those are the ones who are typically underweight. But it's not a – it's an artificial construct. It's not that these names inherently need to be grouped together. It's something that especially people in the US like. It makes for fancy terms. We've had the Nifty 50, we've had the Magnificent Seven. There will be other constructs. It doesn't necessarily mean anything.

AR: Any discussion about momentum here is much broader than Magnificent Seven. Of course, these are part of the momentum basket that you would buy, but there's a lot of momentum going on in each and every market at this time.

EM: Give us more examples.

AR: Oh yeah. You see the same thing happening in for instance, the Japanese equity market. There's also a basket there of stocks that continues to win and win and win. And that's because they play on a certain theme, which is AI. But in Japanese cases, there's also other thematics like infrastructure or electricity infrastructure, which at some point maybe related to AI again. But still you, you do get that kind of basket in every market at the momentum. And you also get it every year. It's not that it’s just this year.

EM: But this year it's been particularly strong.

AR: So that's true. And that to me has also a lot to do with the move towards passive investing. There's more and more people who just sit there and say, “well I do my monthly investment and I buy S&P 500 ETFs because they trade at a few basis points. So very easy to get some exposure to equities.” And that's been sort of taking away the valuation discipline in the market. And there's been this debate about when do you have enough active investors or what does passive actually become a self-reinforcing issue. And I think we are reaching that stage here, although most observers would probably say that we're nowhere near there, and it only takes two or three people to keep the market efficient. I don't believe that. So I think there is a sort of market inefficiency that has crept into the markets over the last couple of years, as ETF flows have been super positive and active fund flows have been neutral or even negative in many cases.

EM: Michiel you're nodding. Does this create any concern? You could argue that we are reaching peak inflows. As a ratio it really can't go any higher.

MP: It’s hard to say whether we're at peak inflows. Inflows usually are a function of just how much money or how much liquidity is around. Interestingly enough, except for the Bank of Japan, most central banks around the world are easing or providing more liquidity rather than shrinking their balance sheets. So I'm not so concerned about the inflow argument. What I do think is that influx of passive money also creates opportunities on the active side. But you have to be very aware of how the market functions. In the end, prices are set by demand and supply. And so as long as demand outstrips supply, stocks are likely to go up. That's something you have to be aware of. You should never isolate your analysis from the fact that demand and supply set the price.

EM: What about mean reversion? So if you perhaps – these are analysts that are forgetting the demand and supply component. For example, Morgan Stanley argues that the odds are 2 to 1 against momentum stocks for 2025. They cite 2024’s powerful momentum run. And they're saying “if you look at history, such strong performance is almost always followed by near full reversal the following year.”

AR: And they point towards June 2007 to June 2008, right? So that makes it all very scary because that's just ahead of the financial crisis, right? You also had this very strong momentum rally comparable to what you've seen in 2024. Still earnings momentum has been a big driver of the price momentum. So that has kept the market sane to a large extent. But there are examples of stocks where you say, “really, why are these continuing to go up without any earnings momentum really?” So it's just more people buying than selling.

MP: I would point to – I mean we are at extremes in terms of US performance over international regions etc. And clearly from a valuation perspective, Europe, Japan, Asia ex-Japan look very, very attractive from an overall valuation perspective. So I think you should be balanced, right? You should continue to take money off from the momentum names, put more money into more value areas. But again, be momentum aware.

AR: So that's the issue again, as I expressed about our meeting, then I everybody is too scared to be underweight the US. And also, you've read that in a lot of market outlooks from different brokers, analysts and asset managers, they're all too scared to be underweight to the US or actually they are bullish on the US because the earnings momentum still sits there. But they are also aware that everybody is already bullish there. So then you think “who's next to buy?” And one day, but who knows when that day will come, indeed you will see that reversal that the narrative about the US is now positive. Positive become more positive. And that's driving the momentum.

And at some point people realize, “hey, there's something wrong with this.” And that's where I highlighted that stock actually moves from weak into strong hands. That's when the weak hands that are clearly in the market now, that have been buying the S&P without any sense of what they're actually buying or. It's just saying, “oh, it's going up every day and every dip is in a buying opportunity.” That's sort of the belief without really focusing in depth like we try to do. Or what are you actually buying when you buy the S&P 500 now. And then suddenly that momentum will turn.

And that's when things can go very rapidly. But as before in August, we thought that this was happening and it lasted six days or something. And then it started to pick back up again. So that narrative about “every dip is a buying opportunity” is also still holding very strongly. And unfortunately, one day you'll have to break that one too, because that's not how the equity market functions.

EM: Michiel, is that a danger of a lack of market discipline, a danger that one day everyone wakes up and realizes the emperor has no clothes on? So is it a nasty, painful correction, or is it simply that this momentum will spread and broaden out to other regions or asset classes that have not had attention?

MP: I think the equity market has already been broadening for a while. And so I'm actually not that concerned also because I do think that, yes, multiples are high, but there's pretty good fundamentals behind it. I would not be too concerned. Things we look at are things like debt levels and of course, indeed, traditional multiples, but also cash generation.

I think there's actually pretty decent opportunities outside that sort of small group of higher priced, high momentum names, especially if long rates keep rising. Also, if you look at unprofitable tech or names in tech with high valuations, they tend to be very sensitive to longer yields in particular. So the ten year US or above. And I actually think there's pretty good opportunities in European quality. That actually has been very weak last year, where I don't think fundamentals are necessarily that bad. But both stocks have gone from obvious to controversial but probably provide pretty good valuations. So I'm actually not that concerned about the market overall. Maybe we'll see some reversal, but they do see enough quality available at decent prices for us to find pretty good opportunities here.

EM: Lots to pick up on there. But I just want to ask just a sidebar question. We spoke – we've been speaking about momentum in the sense of, you know, strong, strong stocks becoming stronger. Is there any example right now in the market of negative momentum weak stocks becoming weaker?

AR: But I think that in some of my thematic funds, for instance, right where with the Trump becoming the president of the United States, a lot of these alternative energy stocks continue to fall and fall essentially, right. Everybody says, “okay, subsidies are going off and then they have to rely on their own.” And at the same time, interest rates are going up. So that becomes reinforcing negative momentum. And it's something I often have discussions about, also with the underlying portfolio managers we work with that you really don't want to have or you don't want to run a portfolio with a negative momentum.

And yet they are doing that. They say, “well, there's nothing else to buy. All the stocks I have are negative momentum at the moment,” and I sympathize with that to a certain extent, because I've had that in my days as Asia Pacific portfolio manager in 2018 to 2020, I was a value investor in Asia Pacific. But everything that was going up was Chinese internet stocks that were at crazy valuations. I didn't want to buy them. I thought the returns on that would not be very attractive longer term. But if I wanted to keep a momentum profile in my portfolio, there was nothing else I could buy because all of the value stocks had become negative momentum.

So there was no more overlap or confluence where you would like to be. And that's what you see in the Global Stars fund, for instance. Now you have a confluence of stocks that are showing good growth, good quality and have positive momentum. So that's fine. That's great. But if you have a portfolio that has a lot of positive value but a lot of negative momentum, that's where the discussion becomes, “what are you going to do?” Because ideally I'd like to have positive momentum. But philosophically – and that's still the point I will come back to – is value is more important to me.

So then I ran a portfolio for three years with negative momentum and I underperformed and clients deserted. But some others were happy that at least you were style consistent and say, “okay, value has negative momentum right now. Let's stick with it.” And that's what you're seeing with thematic investing now, too. I feel that some of those more ESG-driven themes with ESG under pressure are showing some negative momentum at the moment. And then it's more a question of, do you believe that ESG really matters? Then you just sit tight and sort of take the pain of the negative momentum, but still you're trying to mitigate it and you're still looking then, “okay, where can I find least negative momentum?” Because ignoring it is really, really dangerous for your performance.

EM: Exactly. Michiel?

MP: A portfolio or a fund needs to exhibit positive momentum also to outperform. And I would say where we like to have horizons of three to five years, the reality of the matter is, is that you get questions from your clients every month or every quarter. And so that makes it very difficult, right? It makes it very difficult to have – to maintain a long horizon. There's always short term performance pressure.

Maybe one thing I'd like to add to the earlier point, is you should always be very careful in owning things that only depend on momentum. So one of the factors we look at is what's called residual momentum. And residual in this case means momentum that cannot be explained by other factors. That cannot be explained by let's say the size factor or by a growth factor, by value factor, by yield factor or what have you. It's good to be aware but you should never rely on momentum alone. So one it needs to have quality, second it needs to have valuation, third is exhibit momentum. You like to have a combination of all three but never only in isolation.

EM: Confirming a key point both of you've made now. So Michiel, I think top of the pops for you would be the quality aspects of the stock and whatever that means. And for Arnout would be on the value side of things. Michiel, could you elaborate on what it is? What's the quality stock to keep you sane, that you're not carried away by the momentum?

MP: Well, for us, quality is really based on three pillars. So having a really good return on invested capital track record, generating very good ROIC, also generating very good cash in cash flows and being able to reinvest that in the current business. And second or third is really the sustainability factor. Having a good sustainability profile overall, where we really focus on where sustainability is actually good business. Where is it really important? Where does it benefit all stakeholders rather than just shareholders?

EM: Arnout you might want to, you've spoken about your value lens, your value perspective, and perhaps in your current role I'm sure that's inherent to you as a person, but in your current role, perhaps it's more balanced away from that.

AR: Yes.

EM: I want to tag on to that. So a cheeky question, do you use technicals? I know you both fundamental investors, and perhaps you wouldn't want to admit in public that you do, but do you rely on technical indicators also to help you, you know, see in advance where the market might lead?

AR: Yes. Yes. The start of my career was actually doing some research into technical analysis and the added value of that. And of course, as academics, we've been brought up with the efficient market hypothesis, which tells you that there should be no information in historical prices. So everything is already in the price. And then I started investigating that in the early 90s, and I found out that actually in quite a few markets, including the US, but also particularly in Hong Kong, there's a lot of momentum that actually works.

And you need to be aware of that and possibly follow it because it does pay off. So that sort of changed my mind at that time already. And since then I've been an avid user of charts to tell me, indeed what's been happening. Of course, it's also a wonderful way of going through a portfolio or some sort of stock universe to find out what's popular and what's not.

EM: Yes.

AR: So it sort of sets the tone about where the consensus lies at the momentum. And then with a fresh observation, then sometimes you can draw very contrarian conclusions. I am still an avid chart user and the charts that we use at Robeco are also pretty useful from the point of view that they are not just looking at moving averages having been broken, but they break down the market into demand and supply. So, for instance, what you've been seeing now is the market essentially floating higher on no supply, but demand is falling. So that tells you something, that underlying this momentum is weakening, but it can still go higher as long as there's no supply and there's still demand. Although less than a year ago, it does mean that prices can still continue to drift higher.

EM: Michiel, are you a believer?

MP: Yeah, it's quite interesting that it's always frowned upon a bit. I think it should never be used in isolation. It should complement your fundamental work. I actually see it as fundamental work because you're essentially studying the volume of demand and supply, which is super important. We use it primarily for timing buy and sell decisions. So we will never use it standalone. But once we've decided to buy something, we try to find the best momentum to do so. And the same on the sell side, when we have decided to exit something or lower something in terms of weight in the portfolio. We use it to time that decision. I've always found it very beneficial of doing so.

EM: I want to bring it all together and looking into 2025. Understandably, this is a pretty short horizon, but this is what we talk about at the beginning of the year. What are you looking for? What are you wanting to own in 2025 and what are you avoiding? Arnout?

AR: We still have 11 months to go in 2025. Call that a short time? It's not three to five years. No, not like that. But there is still plenty of headway in 2025 to see new trends emerging. And that's why I said just now that to me, what's going to be very interesting is to see how that evolves with that supply at zero and demand falling. To see how that plays out in markets. Is demand going to pick up eventually, and are we going to see indeed more inflows and supply will stay relatively low? Or, like I've discussed before, we are at a momentum where we're just very, very overbought and we are in desperate need of a correction in 2025.

EM: Michiel?

MP: Yeah, I'm not so eager for that correction. But let's see. In principle we'd like to own the S&P 493. So the S&P outside the Magnificent Seven. There's lots of value in mid and small cap domestic US names. I'm also very intrigued by European quality. So European quality has had a very tough year in some cases. A couple of very tough years, in which people have really started to question whether it indeed is quality. And that is something that I like, because when names go from obvious to controversial, but are still showing the good cash flow, the good ROIC is, were convinced it's still quality. So we're looking for European quality in particular. So let's bring it on. I'm looking forward to the rest of 2025.

EM: Not worried at all, it seems.

AR: Now, as multi-asset investors, we always have the escape route of going into treasuries, right? So if you look at treasuries that have basically underperformed cash over the last couple of years already, it's about time for them to have a decent year. But once again, we thought the same last year. And then equities went up another 20 something percent. But this year I'm still bracing for that. But I'm waiting for – my indicators to tell me that this is the real one. And until now, I haven't seen it yet.

MP: Yeah, maybe one sort of thing. We left out a bit, which I think is super important. One of the things that was really difficult the last years was that you had very strong momentum markets with very low volatility. The VIX is at all-time lows, even though in particular the US equity markets have been making new highs week after week after week. And so what you'll likely see is a spike in the VIX. Some change in the market. But in principle it should be good for active investors. And so in this environment I think we can add a lot of value. That's what I'm looking forward to. That we can show that we can identify quality, do well with quality, and benefit when the market environment changes.

EM: Michiel, you said you're looking at European quality, but overall, would you still have a greater preference for US? It seems that this year and the season ahead is all about the US and what the new administration can do.

MP: Yes and no. First, I think the US economy will be significantly stronger than the European one. But given that the dollar has also been so strong, there's a lot of dollar earners in Europe that can actually do very well. In principle, we don't care where stocks are listed. What I do think though, will help US small cap and mid cap is lower taxes, more deregulation, more potential for M&A. That all comes with the Trump administration. So even though we're not Trump fans and I'd like to state that, I do think the US market is very broad, very deep, very liquid that there's plenty of opportunity there as well.

EM: Gentlemen, thank you so much. I've really enjoyed speaking to you. Thanks for your time.

This podcast is for professional investors only.

Arnout van Rijn (AR): Every time you said, “Well, US market is a little bit expensive here. Let's take some money off the table,” then that was the wrong call. Especially when you had that swoon in August and then another small one in September. It was like, “okay, this is the big one right now. The overvaluation is unveiled to the rest of the world, and US equities will start to underperform.” No it didn't.

Welcome to a new episode of the podcast.

Erika van der Merwe (EM): Equity markets are living through one of the most powerful momentum runs in decades, driven in large part by the continued dominance of US large cap equities. But with valuations soaring, the question is can the winners keep on winning or will the momentum train soon lose steam? The momentum factor seems to reward market trends, may flummox value based investors and keeps contrarian investors on their toes. In this show, we take a look at why this factor has been so strong and what might come next. My guest for this discussion are Michiel Plakman. He's lead portfolio manager for Sustainable Global Stars, and Arnout van Rijn, who's portfolio manager in Robeco’s sustainable multi-asset team. Welcome. I'm thrilled to have the two of you here in the studio with me. Thank you for joining.

Both: Thank you.

AR: What a crowd.

EM: Well, let's start with the basics. What do investors mean when they refer to momentum or the momentum factor? Michiel.

Michiel Plakman (MP): In principle, they speak about price momentum, right? That's what people think of when they speak about momentum. Obviously there's much more to momentum. There's also revision momentum earnings momentum itself. But when investors speak about momentum it's usually price momentum.

EM: So what is a momentum stock. I don't know.

AR: It's when more and more people start to take an interest and therefore yeah there's more buyers than sellers. And then the price keeps going up. It doesn't really often mean that the narrative is completely changing, but it just means that more and more people are buying. So valuations are expanding.

EM: So the root of all of this is behavioral finance, human behavior, overreaction.

AR: Yeah, definitely. There's a human error sometimes. But the real issue with momentum is that you need to side with potentially erroneous behavior of investors in order not to lose your shirt, because it can last a very long time. And so you need to – for me, as a value investor, it's more about protecting yourself from not betting against the momentum too much.

EM: Exactly. And that's the point. It's been such a powerful factor over the decades if you look at academic research on it. So investors ignore it at their own peril. But now looking just at the past year, why has momentum been so strong, Michiel, over this more recent period?

MP: Well, one of the things is I think that fundamentals have been in line with momentum, right? So there was also a good reason to – for large cap names that are winning to continue winning. Second is there's just been an influx of money, right. So liquidity, which is a very important underlying factor for that explains why momentum works has been very, very good in the market, especially since the Fed started cutting rates again in September. But if you look all year, momentum has been very, very strong, but also very much aligned with the specific group of names that have been particularly driven not just by my momentum but fundamentals as well. But of course, it's more powerful when the two work together.

EM: Yeah. Arnout is that your assessment? You look at equities but in fact you look at all asset classes. So what are your perceptions then of what the drivers have been?

AR: It’s feeding upon itself, it seems because to me, it's been a bit scary to – sitting in our weekly market meetings where we discuss what's going on. And here there's a tendency to just focus on equities. But when you talk about markets, financial markets in general, over the last 12 months, the factor momentum has come more and more to the fore in our team's discussions. You don't want to bet against the momentum because every time in 2023 and also in 2024, we did a decision that was going against the momentum. It was proven to be wrong. So you've been, for instance, thinking of it for a long time already, “well the US dollar needs to fade, it's overvalued, it needs to at some point come down.” So every time we took a position against the US dollar, that turned out to be wrong. And similarly with what Michiel was discussing when that happens to equities too. Every time you said, “Well, US market is a little bit expensive here. Let's take some money off the table,” then that was the wrong call. Especially when you had that swoon in August and then another small one in September. It was like, “okay, this is the big one right now. The overvaluation is unveiled to the rest of the world, and US equities will start to underperform.” No it didn't. EM: It sounds as though it must go against the grain. It must be really difficult on a daily basis to manage your portfolios of perhaps your common sense tells you this market or this stock is overvalued, and yet you have to keep holding or being overweight. Michiel?

MP: Well, it's a combination, right? You need to look at all your factor exposures. So momentum is one. It's not the only one. But clearly and to be frank, I think that this is something that is more present today than maybe five or ten years ago. It is definitely the case that as a fundamental investor as well, you need to be very momentum aware. That is I think very important.

EM: Michiel, in your explanation of why momentum has been so strong, you refer to this trend that's driven a narrow group of stocks, much of which has been the Magnificent Seven stock. So do you own these in your portfolio?

MP: Yes, we do.

EM: All of them? MP: We own all of them. Not all of them are overweight. So we have a neutral overall exposure I would say, underweight some, overweight others. But in principle, yes, we do own all of them.

EM: So what does that decision look like? Does it feel a bit the way Arnout described it, in your mind? “These stocks, it doesn't make sense. They look too expensive right now but the market's moving. You have to be on the train.”

MP: To be frank they're not all created equal. So there's names in the Magnificent Seven that still have pretty good valuations. There's also ones that are overweight –those are the overpriced; those are the ones who are typically underweight. But it's not a – it's an artificial construct. It's not that these names inherently need to be grouped together. It's something that especially people in the US like. It makes for fancy terms. We've had the Nifty 50, we've had the Magnificent Seven. There will be other constructs. It doesn't necessarily mean anything.

AR: Any discussion about momentum here is much broader than Magnificent Seven. Of course, these are part of the momentum basket that you would buy, but there's a lot of momentum going on in each and every market at this time.

EM: Give us more examples.

AR: Oh yeah. You see the same thing happening in for instance, the Japanese equity market. There's also a basket there of stocks that continues to win and win and win. And that's because they play on a certain theme, which is AI. But in Japanese cases, there's also other thematics like infrastructure or electricity infrastructure, which at some point maybe related to AI again. But still you, you do get that kind of basket in every market at the momentum. And you also get it every year. It's not that it’s just this year.

EM: But this year it's been particularly strong.

AR: So that's true. And that to me has also a lot to do with the move towards passive investing. There's more and more people who just sit there and say, “well I do my monthly investment and I buy S&P 500 ETFs because they trade at a few basis points. So very easy to get some exposure to equities.” And that's been sort of taking away the valuation discipline in the market. And there's been this debate about when do you have enough active investors or what does passive actually become a self-reinforcing issue. And I think we are reaching that stage here, although most observers would probably say that we're nowhere near there, and it only takes two or three people to keep the market efficient. I don't believe that. So I think there is a sort of market inefficiency that has crept into the markets over the last couple of years, as ETF flows have been super positive and active fund flows have been neutral or even negative in many cases.

EM: Michiel you're nodding. Does this create any concern? You could argue that we are reaching peak inflows. As a ratio it really can't go any higher.

MP: It’s hard to say whether we're at peak inflows. Inflows usually are a function of just how much money or how much liquidity is around. Interestingly enough, except for the Bank of Japan, most central banks around the world are easing or providing more liquidity rather than shrinking their balance sheets. So I'm not so concerned about the inflow argument. What I do think is that influx of passive money also creates opportunities on the active side. But you have to be very aware of how the market functions. In the end, prices are set by demand and supply. And so as long as demand outstrips supply, stocks are likely to go up. That's something you have to be aware of. You should never isolate your analysis from the fact that demand and supply set the price.

EM: What about mean reversion? So if you perhaps – these are analysts that are forgetting the demand and supply component. For example, Morgan Stanley argues that the odds are 2 to 1 against momentum stocks for 2025. They cite 2024’s powerful momentum run. And they're saying “if you look at history, such strong performance is almost always followed by near full reversal the following year.”

AR: And they point towards June 2007 to June 2008, right? So that makes it all very scary because that's just ahead of the financial crisis, right? You also had this very strong momentum rally comparable to what you've seen in 2024. Still earnings momentum has been a big driver of the price momentum. So that has kept the market sane to a large extent. But there are examples of stocks where you say, “really, why are these continuing to go up without any earnings momentum really?” So it's just more people buying than selling.

MP: I would point to – I mean we are at extremes in terms of US performance over international regions etc. And clearly from a valuation perspective, Europe, Japan, Asia ex-Japan look very, very attractive from an overall valuation perspective. So I think you should be balanced, right? You should continue to take money off from the momentum names, put more money into more value areas. But again, be momentum aware.

AR: So that's the issue again, as I expressed about our meeting, then I everybody is too scared to be underweight the US. And also, you've read that in a lot of market outlooks from different brokers, analysts and asset managers, they're all too scared to be underweight to the US or actually they are bullish on the US because the earnings momentum still sits there. But they are also aware that everybody is already bullish there. So then you think “who's next to buy?” And one day, but who knows when that day will come, indeed you will see that reversal that the narrative about the US is now positive. Positive become more positive. And that's driving the momentum. And at some point people realize, “hey, there's something wrong with this.” And that's where I highlighted that stock actually moves from weak into strong hands. That's when the weak hands that are clearly in the market now, that have been buying the S&P without any sense of what they're actually buying or. It's just saying, “oh, it's going up every day and every dip is in a buying opportunity.” That's sort of the belief without really focusing in depth like we try to do. Or what are you actually buying when you buy the S&P 500 now. And then suddenly that momentum will turn.

And that's when things can go very rapidly. But as before in August, we thought that this was happening and it lasted six days or something. And then it started to pick back up again. So that narrative about “every dip is a buying opportunity” is also still holding very strongly. And unfortunately, one day you'll have to break that one too, because that's not how the equity market functions.

EM: Michiel, is that a danger of a lack of market discipline, a danger that one day everyone wakes up and realizes the emperor has no clothes on? So is it a nasty, painful correction, or is it simply that this momentum will spread and broaden out to other regions or asset classes that have not had attention?

MP: I think the equity market has already been broadening for a while. And so I'm actually not that concerned also because I do think that, yes, multiples are high, but there's pretty good fundamentals behind it. I would not be too concerned. Things we look at are things like debt levels and of course, indeed, traditional multiples, but also cash generation. I think there's actually pretty decent opportunities outside that sort of small group of higher priced, high momentum names, especially if long rates keep rising. Also, if you look at unprofitable tech or names in tech with high valuations, they tend to be very sensitive to longer yields in particular. So the ten year US or above. And I actually think there's pretty good opportunities in European quality. That actually has been very weak last year, where I don't think fundamentals are necessarily that bad. But both stocks have gone from obvious to controversial but probably provide pretty good valuations. So I'm actually not that concerned about the market overall. Maybe we'll see some reversal, but they do see enough quality available at decent prices for us to find pretty good opportunities here.

EM: Lots to pick up on there. But I just want to ask just a sidebar question. We spoke – we've been speaking about momentum in the sense of, you know, strong, strong stocks becoming stronger. Is there any example right now in the market of negative momentum weak stocks becoming weaker?

AR: But I think that in some of my thematic funds, for instance, right where with the Trump becoming the president of the United States, a lot of these alternative energy stocks continue to fall and fall essentially, right. Everybody says, “okay, subsidies are going off and then they have to rely on their own.” And at the same time, interest rates are going up. So that becomes reinforcing negative momentum. And it's something I often have discussions about, also with the underlying portfolio managers we work with that you really don't want to have or you don't want to run a portfolio with a negative momentum. And yet they are doing that. They say, “well, there's nothing else to buy. All the stocks I have are negative momentum at the moment,” and I sympathize with that to a certain extent, because I've had that in my days as Asia Pacific portfolio manager in 2018 to 2020, I was a value investor in Asia Pacific. But everything that was going up was Chinese internet stocks that were at crazy valuations. I didn't want to buy them. I thought the returns on that would not be very attractive longer term. But if I wanted to keep a momentum profile in my portfolio, there was nothing else I could buy because all of the value stocks had become negative momentum. So there was no more overlap or confluence where you would like to be. And that's what you see in the Global Stars fund, for instance. Now you have a confluence of stocks that are showing good growth, good quality and have positive momentum. So that's fine. That's great. But if you have a portfolio that has a lot of positive value but a lot of negative momentum, that's where the discussion becomes, “what are you going to do?” Because ideally I'd like to have positive momentum. But philosophically – and that's still the point I will come back to – is value is more important to me. So then I ran a portfolio for three years with negative momentum and I underperformed and clients deserted. But some others were happy that at least you were style consistent and say, “okay, value has negative momentum right now. Let's stick with it.” And that's what you're seeing with thematic investing now, too. I feel that some of those more ESG-driven themes with ESG under pressure are showing some negative momentum at the moment. And then it's more a question of, do you believe that ESG really matters? Then you just sit tight and sort of take the pain of the negative momentum, but still you're trying to mitigate it and you're still looking then, “okay, where can I find least negative momentum?” Because ignoring it is really, really dangerous for your performance.

EM: Exactly. Michiel?

MP: A portfolio or a fund needs to exhibit positive momentum also to outperform. And I would say where we like to have horizons of three to five years, the reality of the matter is, is that you get questions from your clients every month or every quarter. And so that makes it very difficult, right? It makes it very difficult to have – to maintain a long horizon. There's always short term performance pressure. Maybe one thing I'd like to add to the earlier point, is you should always be very careful in owning things that only depend on momentum. So one of the factors we look at is what's called residual momentum. And residual in this case means momentum that cannot be explained by other factors. That cannot be explained by let's say the size factor or by a growth factor, by value factor, by yield factor or what have you. It's good to be aware but you should never rely on momentum alone. So one it needs to have quality, second it needs to have valuation, third is exhibit momentum. You like to have a combination of all three but never only in isolation.

EM: Confirming a key point both of you've made now. So Michiel, I think top of the pops for you would be the quality aspects of the stock and whatever that means. And for Arnout would be on the value side of things. Michiel, could you elaborate on what it is? What's the quality stock to keep you sane, that you're not carried away by the momentum?

MP: Well, for us, quality is really based on three pillars. So having a really good return on invested capital track record, generating very good ROIC, also generating very good cash in cash flows and being able to reinvest that in the current business. And second or third is really the sustainability factor. Having a good sustainability profile overall, where we really focus on where sustainability is actually good business. Where is it really important? Where does it benefit all stakeholders rather than just shareholders?

EM: Arnout you might want to, you've spoken about your value lens, your value perspective, and perhaps in your current role I'm sure that's inherent to you as a person, but in your current role, perhaps it's more balanced away from that.

AR: Yes.

EM: I want to tag on to that. So a cheeky question, do you use technicals? I know you both fundamental investors, and perhaps you wouldn't want to admit in public that you do, but do you rely on technical indicators also to help you, you know, see in advance where the market might lead?

AR: Yes. Yes. The start of my career was actually doing some research into technical analysis and the added value of that. And of course, as academics, we've been brought up with the efficient market hypothesis, which tells you that there should be no information in historical prices. So everything is already in the price. And then I started investigating that in the early 90s, and I found out that actually in quite a few markets, including the US, but also particularly in Hong Kong, there's a lot of momentum that actually works. And you need to be aware of that and possibly follow it because it does pay off. So that sort of changed my mind at that time already. And since then I've been an avid user of charts to tell me, indeed what's been happening. Of course, it's also a wonderful way of going through a portfolio or some sort of stock universe to find out what's popular and what's not.

EM: Yes.

AR: So it sort of sets the tone about where the consensus lies at the momentum. And then with a fresh observation, then sometimes you can draw very contrarian conclusions. I am still an avid chart user and the charts that we use at Robeco are also pretty useful from the point of view that they are not just looking at moving averages having been broken, but they break down the market into demand and supply. So, for instance, what you've been seeing now is the market essentially floating higher on no supply, but demand is falling. So that tells you something, that underlying this momentum is weakening, but it can still go higher as long as there's no supply and there's still demand. Although less than a year ago, it does mean that prices can still continue to drift higher.

EM: Michiel, are you a believer?

MP: Yeah, it's quite interesting that it's always frowned upon a bit. I think it should never be used in isolation. It should complement your fundamental work. I actually see it as fundamental work because you're essentially studying the volume of demand and supply, which is super important. We use it primarily for timing buy and sell decisions. So we will never use it standalone. But once we've decided to buy something, we try to find the best momentum to do so. And the same on the sell side, when we have decided to exit something or lower something in terms of weight in the portfolio. We use it to time that decision. I've always found it very beneficial of doing so.

EM: I want to bring it all together and looking into 2025. Understandably, this is a pretty short horizon, but this is what we talk about at the beginning of the year. What are you looking for? What are you wanting to own in 2025 and what are you avoiding? Arnout?

AR: We still have 11 months to go in 2025. Call that a short time? It's not three to five years. No, not like that. But there is still plenty of headway in 2025 to see new trends emerging. And that's why I said just now that to me, what's going to be very interesting is to see how that evolves with that supply at zero and demand falling. To see how that plays out in markets. Is demand going to pick up eventually, and are we going to see indeed more inflows and supply will stay relatively low? Or, like I've discussed before, we are at a momentum where we're just very, very overbought and we are in desperate need of a correction in 2025.

EM: Michiel?

MP: Yeah, I'm not so eager for that correction. But let's see. In principle we'd like to own the S&P 493. So the S&P outside the Magnificent Seven. There's lots of value in mid and small cap domestic US names. I'm also very intrigued by European quality. So European quality has had a very tough year in some cases. A couple of very tough years, in which people have really started to question whether it indeed is quality. And that is something that I like, because when names go from obvious to controversial, but are still showing the good cash flow, the good ROIC is, were convinced it's still quality. So we're looking for European quality in particular. So let's bring it on. I'm looking forward to the rest of 2025.

EM: Not worried at all, it seems. AR: Now, as multi-asset investors, we always have the escape route of going into treasuries, right? So if you look at treasuries that have basically underperformed cash over the last couple of years already, it's about time for them to have a decent year. But once again, we thought the same last year. And then equities went up another 20 something percent. But this year I'm still bracing for that. But I'm waiting for – my indicators to tell me that this is the real one. And until now, I haven't seen it yet.

MP: Yeah, maybe one sort of thing. We left out a bit, which I think is super important. One of the things that was really difficult the last years was that you had very strong momentum markets with very low volatility. The VIX is at all-time lows, even though in particular the US equity markets have been making new highs week after week after week. And so what you'll likely see is a spike in the VIX. Some change in the market. But in principle it should be good for active investors. And so in this environment I think we can add a lot of value. That's what I'm looking forward to. That we can show that we can identify quality, do well with quality, and benefit when the market environment changes.

EM: Michiel, you said you're looking at European quality, but overall, would you still have a greater preference for US? It seems that this year and the season ahead is all about the US and what the new administration can do.

MP: Yes and no. First, I think the US economy will be significantly stronger than the European one. But given that the dollar has also been so strong, there's a lot of dollar earners in Europe that can actually do very well. In principle, we don't care where stocks are listed. What I do think though, will help US small cap and mid cap is lower taxes, more deregulation, more potential for M&A. That all comes with the Trump administration. So even though we're not Trump fans and I'd like to state that, I do think the US market is very broad, very deep, very liquid that there's plenty of opportunity there as well.

EM: Gentlemen, thank you so much. I've really enjoyed speaking to you. Thanks for your time.

Both: Thank you Erika.

EM: Well, to listeners, thanks for being here and enjoying this conversation. We publish a new episode every month covering a range of investment related topics. This podcast and Robeco's Markets podcast, In Tune with the Markets, are available on all major podcast platforms and on the Robeco website, of course. If you subscribe, you'll receive a notification as soon as the new episode is published. In the meantime, please rate the show and share the show link with a friend. Until next time.

Thanks for joining this Robeco podcast. Please tune in next time as well. Important information. This publication is intended for professional investors. The podcast was brought to you by Robeco and in the US by Robeco Institutional Asset Management US Inc, a Delaware corporation as well as an investment advisor registered with the US Securities and Exchange Commission. Robeco Institutional Asset Management US is a wholly owned subsidiary of ORIX Corporation Europe N.V., a Dutch investment management firm located in Rotterdam, the Netherlands. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and AIFS for the Netherlands Authority for the Financial Markets in Amsterdam.: Thank you Erika.