Mark Barnes
Marlies van Boven
Christine Haggerty
Most factors fared better than their respective benchmarks in the 2022 market rout, in a testament to their effectiveness as investing tools after more mixed performances in prior years.
As we highlight in our latest Equity Factor Insights report, Value, Yield and Low Volatility were the top performers for the year, as investors favored inflation beneficiaries, less cyclically sensitive and high-dividend-paying stocks over pricier growth stocks amid the extreme volatility plaguing global markets for the past year. Though a modest outperformer in Europe, Asia Pacific and Emerging markets, Quality generally trailed its factor cohorts, hurt mainly be its large exposure to plunging Technology and other growth stocks.
Notably, all EM factors held up far better than the EM benchmark in 2022 and most also recorded stronger relative gains than those of developed-market peers, especially in Size.
Benchmark returns (TR, LC %) – 12-months ended December 31, 2022
Source: FTSE Russell. Data as of December 31, 2022. Past performance is no guarantee to future results. Please see the end for important disclosures.
Global Value rotation resumes in Q4 relief rally, extending full-year lead
After stalling in growth-stock rebound last summer, the global Value rotation went into high gear in the final stretch of 2022, strongly outpacing more defensive Quality (and Low Vol). Ebbing recession fears fueled an investor rush into less expensive, cyclical and inflation beneficiaries (led by Financials and Industrials), which account for a bigger share of the Value factor.
Value vs Quality returns (TR, rebased)
Source: FTSE Russell. Data through December 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Both factors have been held captive for the past year to the extreme swings in investor expectations for inflation, the pace of monetary tightening and the potential effects on global growth.
Short and long US Treasury yields eased over the summer months as rising hopes that deteriorating economic indicators would prompt an earlier end to the aggressive Fed rate-hiking cycle, only to surge higher again as policymakers remained resolute in their aggressive inflation-fighting stance. Though down from its 2022 peak above 4% in October, the 10-year US bond yield finished the year in an upswing after Fed statements vowing to continue raising rates into the new year, albeit at a slower pace than in 2022.
10-year US Treasury bond yield (%)
Source: FTSE Russell. Data through December 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
In the wake of several jumbo Fed rate hikes, key portions of the US yield curve have been inverted since the middle of last year, in a classic recession signal. However, spreads between long and short US bond yields widened from their troughs in early December.
US Treasury yield spreads (%)
Source: FTSE Russell. Data through December 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Yield curve crosswinds
As shown below, 24-month correlations between Value and shifts in the slope of the US yield curve have generally been positive across markets and have grown more so recently, particularly in the US and Europe. Though the US yield curve remains inverted, the year-end widening in yield spreads has been a tailwind for Value.
24-month correlations of Value to one-month changes in slope of the US Treasury yield curve (10yr minus 2yr)
Source: FTSE Russell. Data through December 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Energy vs Technology duel called the shots
Factor behavior in 2022 was heavily influenced by extraordinarily wide performance divergences between the strongest and weakest stock groups last year, a phenomenon we covered in an earlier blog post.
To illustrate, we highlight the 12-month attributed allocation effects of Technology, Financials and Energy on the relative returns of Value, Yield and Quality for the US, UK and Europe. Value and Yield both benefited greatly from overweights in the last two industries (among the most resilient stocks in 2022) across all three markets, and from large underweights in Technology stocks (among the biggest decliners). Large exposures to the ‘tech wreck’ were the biggest drag on Quality in the US and Europe, as was the factor’s large underweight in Energy in the UK, the only market of the three to post a gain in 2022.
Select industry allocation effects on relative Value, Yield and Quality returns (%) – 12-months ended December 31, 2022
Source: FTSE Russell. Based on Industry Classification Benchmark (ICB) data as of December 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
For more on how equity factors performed globally please see our latest Equity Factor Insights report.
Disclaimer
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