During 2020’s second quarter rebound, U.S. equities saw stronger performance than other developed markets like the U.K. and the rest of Europe.
However, during the coronavirus pandemic so far, factors have moved largely in tandem in those geographies, according to Philip Lawlor, managing director and head of global investment research at FTSE Russell, during a webinar hosted by the firm last week. “We actually had a much more consistent profile across regions with a fairly uniform rotation out of the low-volatility factor and the yield factors into size or smaller-cap stocks.”
The trend toward size came through strongly during the first few weeks of the second quarter but fizzled out into June, he said.
Over the first half of the year, factors performed similarly across regions with a positive skew towards quality and momentum, while size, value and yield underperformed in most regions. In particular, momentum has been on a wild ride, said Lawlor, noting it performed well during the initial stages of the market meltdown, slipped in May as restrictions began to ease worldwide and is now climbing again as optimism deteriorates. “We’ve seen a very similar profile in terms of this roller-coaster ride for the performance of quality and profitability factors in year-to-date data.”
Part of momentum’s outperformance lies in its sector exposure, he added. “We can see in the case of the U.S., momentum factor benefited from being long technology and health care, which we can see are two sectors that have delivered positive performance contributions, most notably technology. And also the factor benefited from being short the financial, oil and industrials sectors which underperformed.”
Looking at the last 12 months, quality and value have been on a long-term divergence trend, with quality outperforming across the U.S., the U.K. and Europe. The effects of the pandemic have served to strengthen this trend, with the notable exception of quality’s outperformance somewhat muted in the U.K. during 2020 so far, said Marlies van Boven, head of global investment research for Europe, the Middle East and Africa at FTSE Russell, also speaking in the webinar.
Quality tends to be overweight technology, which has been driving the gap between quality and volatility throughout the pandemic, she said. But for the U.K., the quality factor’s performance was stifled by heavier exposure to oil and gas and basic materials than appears in quality in the U.S. market or the rest of Europe.