Value and momentum

Value and momentum in action

This month the dynamic described here has been somewhat disrupted, as in the autumn of 2019 most areas have had a couple of up-months. This may be corrected as further data comes in.

  • The ‘overshooting’ dynamic is illustrated here with relative value on the horizontal axis, and return on the vertical axis

  • The blue dots are averaged over the last year, the pink dots the last 6 months, so they illustrate the direction of motion over the last year

  • In a perfect world all these points would be near (0,0) with prices rising with inflation

  • In the real world where people over-react, a prolonged under-performance (below the horizontal axis) leads to a drift rightwards into ‘good value’ (e.g. Prime London)…

  • Then prices rise, (moves above horizontal axis) and an area gets ‘hot’ (e.g. Bolton)…

  • When the area is at fair value it continues ‘hot’ with momentum carrying it left (e.g. Manchester)…

  • Finally momentum subsides and the area starts under-performing (moves below the horizontal axis, e.g. Southeast England)…

  • Duly followed by a period of under-performance (e.g. much of London)…

  • Rinse and repeat for an anticlockwise rotation

In the next section we analyse this in a more powerful framework.