By Philip Lawlor, managing director, Global Markets Research
The dramatic outperformance of defensive factors – namely Quality, Profitability and Low Volatility – over their more economically vulnerable Value and Size (or smaller cap) factors was the dominant global theme in the first quarter. This further widened the already large 12-month performance gap between the two camps.
Relative factor indicator performance (local currency, TR %) – Q1 2020
Source: FTSE Russell. Data as of March 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
Delving deeper into the main drivers of the Q1 2020 factor performances, our research uncovered several prominent trends:
- Sector exposures call the shots. Quality and Profitability are both significantly underweight Financials, which ranked among the worst-performing sectors in most markets, and their overweights in Health Care and Technology, among the best-performing sectors. Value and Size have the opposite exposures in most markets.
- Stable profits and strong balance sheets rule. Stocks offering high ROA and ROE significantly outperformed other gauges of superior corporate quality in most markets, as did those with low net debt/equity, especially in Emerging Markets. The exception was the UK, where Low Volatility outperformed Quality, while measures of financial leverage significantly lagged.
Relative Profitability component returns vs broad market (LC, TR %) – Q1 2020
Relative Leverage component returns vs broad market (LC, TR %)
Source: FTSE Russell. Data as of March 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
- Macro sensitivity has intensified for developed-market factors. Our analysis found that swings in US Treasuries (see chart below) and commodity prices have become far bigger drivers of factor returns across developed markets. For example, Quality, Profitability and Low Volatility have grown more positively correlated in the US, UK and Europe, while Value and Size have become more negatively correlated across developed markets.
- Correlations more muted in EM. Interestingly, factor returns in Emerging Markets are far less sensitive to macro shifts than developed peers. Notably, Profitability is negatively correlated to 10-year US bonds.
Factor correlations to 10-Year US Treasury Bonds Since March 2019
Source: FTSE Russell. March 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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