By Philip Lawlor, managing director, head of Global Markets Research
Not surprisingly, factor performances have exhibited the same desire for safety that has gripped other corners of the global capital markets this year. Amid the widespread losses since equity markets peaked in mid-February, defensive Quality and Low Volatility factors have strongly outperformed riskier Value and Size, accelerating trends in place for the past 12 months (Chart 1).
The virus outbreak has cut a particularly deep gulf between defensive and riskier factor performance in the US (Chart 2). The stocks of US companies with relatively reliable and more stable profitability and lower debt burdens have suffered far smaller declines than those of less well-endowed companies, catapulting Quality, Profitability and Low Vol leadership over Value and Size. Our analysis found similar stark divergences in factor performance in Europe, Japan, Asia Pacific and Emerging Markets.
Quality outperformance owes much to its sector exposures. Across all markets, Quality’s underweight in lagging financial stocks helped (notably, Value is overweight financials). Overweights in more resilient health care and consumer goods stocks gave Quality a lift in the US, Europe, Asia Pacific and Emerging Markets. In Japan, the factor got a boost from exposure to industrials.
As was the case last year, the outlier from these mostly synchronous global factor trends was the UK. Specifically, the spectacular Q4 outperformance of UK Size—as easing hard-Brexit anxieties and the rebound in sterling fueled a rotation into more domestically exposed smaller-cap stocks—has completely evaporated. UK Size was hurt by its underweight in outperforming health care and consumer goods. Like its peers, UK Low Vol has had a resurgence this year, but Quality and Profitability have been major laggards.
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