- Factor returns vary widely by region
- The average US stock has lagged the benchmark recently
- Energy maintains Momentum exposure, but can it last?
Factor returns vary widely by region
As countries and regions have seen wide spreads in equity-market returns this year, so too have factors when compared across regions. For example, Value’s return was extremely strong through late June in the US and Europe, as compared with Japan and Asia ex-Japan. Since then, the factor has reversed sharply in the former whereas the return has been much more stable in the latter two. Earnings Yield, in contrast, has produced higher returns all year in the US than it has in the other markets. Since April, Medium-Term Momentum has been much stronger in Europe and Asia ex-Japan than in the US, where its return has been quite negative. The return from Market Sensitivity has been much more negative in the US than in the other three regions.
Not only do these return differences highlight how investor behavior has varied from market to market, but they also suggest that style investors who want to capture factor returns most accurately may be better off using a more local model rather than a broad global one.
The following cumulative factor returns charts through 14 July 2022 are drawn from our various regional risk monitors:
The average US stock has lagged the benchmark recently
Another difference in the US versus other markets is in market breadth. In six of the past eight five-day periods, including the one ended July 14, most of the individual stocks in the STOXX USA 900 fared worse than the index, upping the odds of a given manager underperforming. Also interesting is the variability around the 50% line in the US — in a given week, at least over the past year, the likelihood of a random stock beating the market over a five-day period was, well, random. For example, only about 32% of stocks outpaced the index in the five days ending 24 March, whereas roughly two-thirds beat the index in late April. In addition, eyeballing the chart, we see that the best weeks for outperformance seemed to be followed by the worst ones.
In contrast, over the past year the range in the proportion of stocks in the STOXX Global 1800 ex-USA outperforming the index was much smaller: from about 40% to approximately 60%, and did not see big changes from one week to the next. The difference in the percent of stocks beating the benchmark is likely the result of the relatively higher stock concentration in the US, a market still dominated by Info Tech. As that sector goes, so goes the index. Still, for both benchmarks, the average proportion of stocks beating the index in the past year’s worth of five-day periods was just under 50%.
See weekly asset return proportion ahead of index graphs from the equity risk monitors as of July 14, 2022:
Energy maintains Momentum exposure, but can it last?
Global Energy stocks blew away those in most other sectors for much of this year, until June 9, when they started to retreat sharply. They have lost roughly 25% since then, while other sectors have fallen much less. Still, the average Medium-Term Momentum score for Energy stocks is far higher than that of any other sector. In fact, the 1.6 weighted average Momentum exposure for Energy is far higher in magnitude than the exposure of any other sector to any other factor. Momentum investors should take note. If oil prices and Energy stocks continue to slide, these high exposures could evaporate, requiring a good deal of turnover to regain them. Of course, these exposures could also drive continued underperformance of Momentum (up 70 basis points in the last week in the WW4 model, but down 1.8% in the last month) which may hurt portfolio returns.
See sector style exposures graph from the Global Developed Markets equity risk monitor as of July 14, 2022: