By Philip Lawlor, managing director, head of global market research
Global equity markets rode some dramatic twists and turns in 2019, and factor performance followed suit. Our latest Factor Indicator report highlights the most notable theme in factoring investing of the past year. They may provide important clues for what lies ahead in 2020:
Quality bias held strong despite Q4 risk rally
While risk appetite has markedly improved in recent months, investors generally remained guarded, favoring the stocks of companies with relatively reliable profitability and stronger balance sheets. These preferences helped solidify Quality (and Profitability) factor leadership across most markets (except in the UK) for the year, while the Q4 rallies in Value and Size faltered by year end.
Source: FTSE Russell and Refinitiv. Data through December 31, 2019. Regional Factor Indicators represent hypothetical, historical performance, based on FTSE Global Equity Index Series and the FTSE Global Factor Index Series. Past performance is no guarantee of future results.
UK (smaller-cap) Size was the star performer globally
The real standout from these mostly synchronous global factor trends, however, was UK Size, which strongly outperformed in both the Q4 and 2019 (the latter by 7.6%), as easing hard-Brexit anxiety fueled a strong resurgence in sterling and a rotation into more domestically exposed smaller-cap stocks. UK Size also benefited from large overweights in Industrials and Consumer Services, which were among the best performing UK sectors last year.
Source: FTSE Russell and Refinitiv. Data through December 31, 2019. Regional Factor Indicators represent hypothetical, historical performance, based on FTSE Global Equity Index Series and the FTSE Global Factor Index Series. Past performance is no guarantee of future results.
Spotlight on low leverage bolstered Quality performance
Quality outperformance owed much to the popularity of stocks with superior returns on assets (ROA) and equity (ROE) and lower debt burdens, particularly as measured by forward net debt/equity.
Source: FTSE Russell and Refinitiv. Data through December 31, 2019. Regional Factor Indicators represent hypothetical, historical performance, based on FTSE Global Equity Index Series and the FTSE Global Factor Index Series. Past performance is no guarantee of future results.
Cyclical sector rotation also played a role
Quality also benefited from its overweight in Technology, Industrials and other mostly economically sensitive sectors across markets, as well as underweights in lagging defensive sectors such as telecommunications and utilities.
Shifts in US Treasury prices a bigger factor driver today
Our analysis shows that Value and Size have grown more negatively correlated to both short- and long-dated US Treasury prices globally, while Low Volatility and Momentum have become more positively correlated, except in EM. Interestingly, EM factor performance is generally less sensitive than that of developed peers to macros shifts, except for commodity prices such as oil and copper.
As these results indicate, factor behavior over the past year has been governed by the shifting outlook in the global economic cycle and monetary policy/interest rates. Investors can potentially mine these linkages for insights into how best to navigate the year ahead.
For a deeper dive into these topics, register for the upcoming quarterly Factor Investing webinar: Americas & Europe, Asia Pacific.
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