By Mark Barnes, PhD, and Christine Haggerty, Global Investment Research
Quality was the star performer in most markets in the first-quarter rollercoaster ride, with most of the factor's outperformance coming in March, when a banking-sector crisis drove a massive rotation into stocks viewed as less vulnerable to the possible economic and credit-market fallout.
As we document in our latest Equity Factor Insights report, it was a stunning reversal from patterns of the past year. Quality broadly outpaced its respective broad-market benchmarks and all other factors in Q1, most significantly the pandemic-era champs Value and Yield. In fact, it was the only factor to outperform the market in the US and Europe. The exception was the UK, where (small) Size was the lone outperformer and Quality its biggest laggard. And, in contrast to its developed-market peers, most emerging-market factors outperformed the benchmark (although Quality did best).
Regional relative factor returns vs benchmark – Three months ended March 31, 2023 (TR, LC %)
Source: FTSE Russell. Data as of March 31, 2023. Past performance is no guarantee to future results. Please see the end for important disclosures.
A small band of winners drives Q1 global rally
Quality’s dominance over all other factors was largely an outgrowth of the wide divergence between industry winners and losers in Q1. As the contributions to benchmark returns (chart below) illustrates, Technology, Consumer Discretionary and Industrials dominated the gainers across markets, while other industries, notably Financials and Energy, posted much smaller gains or fell in most markets.
Regional Equity Market Returns Q1 2023 (TR, LC %)
Source: FTSE Russell. Data as of March 31, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Tech, Discretionary and Financials in the driver’s seat
In most markets, Quality benefited overwhelmingly from the huge rebounds in Technology, Discretionary and Industrials stocks and its far smaller exposure to the carnage in Financials in March, particularly among smaller banks. Conversely, Value (and Yield) were hurt most by their underweights in the growth-heavy industries and by overweights in Financials and other more cyclically sensitive stock groups.
This dichotomy was most apparent in the particularly large performance gap between Quality and Value in the US and Europe, as shown below.
Industry allocation effects – Three months ended March 31, 2023 (%)
Source: FTSE Russell. Data as of March 31, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
UK factors dance to a different drummer
Factor behavior in the UK had very different drivers: The broad UK market has only a tiny weight in Technology, so it (and the Quality factor) missed out on the sector’s global boom this past quarter. However, UK Size was heavily tilted to the big gains in the Discretionary, Industrials and Staples industries, while also benefiting from its underweight in slumping Materials stocks (which also detracted from Quality).
Industry allocation effects – Three months ended March 31, 2023 (%)
Source: FTSE Russell. Data as of March 31, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
For more on how global equity factor performance, please see our latest Market Maps Equity Factor Insights report and/or Subscribe to our blog.
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