By Mark Barnes, head of investment research (Americas) and Marlies van Boven, head of investment research (EMEA)
The rotation away from pricey defensive factors (notably Quality) into their cyclically sensitive counterparts (led by Value) went into overdrive in Q1 2021 as markets recalibrated expectations for a quicker post-crisis economic recovery.
As shown below, Value, Yield and Size strongly outperformed across markets in the quarter, while Quality and Momentum lagged. Japan led the relative gains in the former three factors, having sat out the rotation that began elsewhere in the previous quarter.
Q1 2021 – Regional relative returns vs broad-market indexes (LC, %)
Source: FTSE Russell. Data as of March 31, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
With their dramatic rebounds since last November, Value and Size have seized the lead from long-dominant Quality and Momentum for the 12-month period, which now includes data only from the rally after the pandemic lows of last March.
The three charts below best illustrate the rotation's journey. Value is now outperforming for the last 12 months in all markets except Emerging Markets (albeit only barely so in Japan).
Value ̶ Regional relative returns (LC, rebased)
Source: FTSE Russell. Date through March 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Size has extended its outperformance since last fall in the UK, Europe and the US, broke into positive territory in EM and Asia Pacific, and nearly did so in Japan. The other key risk factor (not shown), Yield remains a laggard for the longer time frame despite its robust global Q1 rebound.
(Smaller cap) Size ̶ Regional relative returns (LC, rebased)
Source: FTSE Russell. Data through March 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
As is expected during regime changes, long-term Momentum has lagged since last November with the sharp shift into longtime underperforming factors and is now trailing for the 12-month period in all regions except EM.
Long-Term Momentum ̶ Regional relative returns (LC, rebased)
Source: FTSE Russell. Data through March 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Recent Value and Size outperformance has been propelled by these factors' much bigger exposures to the robust rebounds in long-shunned sectors (notably Financials and Oil & Gas) viewed as the likely beneficiaries of reflating economy, and far smaller weightings in Technology and other stable-growth winners that have lagged amid the recent rise in bond yields. Indeed, Financials and other pandemic-stricken cyclical sectors have dominated the recent ramp-up in 2021 earnings growth forecasts. This trend is confirmed by the high correlations between Value and Size performance and rising bond yields and commodity prices.
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