Where We Stand on Factors

Mike explains why we stand by our views on equity style factors despite the recent performance shakeup.

The coronavirus outbreak has altered market dynamics since late January – including in the space of equity style factors. One example, Quality has posted more muted gains after strong outperformance in late 2019. We stand by our tactical views on factors for now, including a modest overweight on quality. These are anchored by our expectation for a global growth uptick to resume once the outbreak recedes, although the depth and width of the eventual V-shaped recovery are uncertain.

The performance of equity style factors – broad, persistent drivers of return – has historically ebbed and flowed as the economy goes through different phases of a cycle. The quality factor (companies with sound balance sheets) has tended to do well during late-cycle periods – such as where we stand now. Living up to this expectation, quality posted outsized returns in the fourth quarter in risk-adjusted terms, outpacing other style factors. That outperformance has faded since the coronavirus outbreak – alongside improving performance of momentum (stocks with rising prices) and further weakness in value (cheap stocks relative to fundamentals). See the chart above. For now, we still see room for our factor views to play out over six to 12 months.

What could explain the shifting dynamics behind factor returns since the coronavirus outbreak? We had expected quality to perform well over our tactical horizon of six to 12 months, as the factor has tended to be resilient in late-cycle periods and includes global firms that stand to benefit from a pause in trade tensions. The spread of the virus – and the containment measures imposed by the Chinese authorities – have triggered global supply chain disruptions and a hit to global growth, making such global firms vulnerable. We still see the outbreak delaying – but not derailing – the global growth uptick that we have been expecting to take root in 2020. As a result, we still favor quality on a tactical basis.