What Works When Equity Markets Sell Off?
From extreme heat to record inflation and plummeting markets, 2022 continues to break records. This past quarter was the third worst on record for markets since 2005 and narrowly missed out on being in the top 10 of all time.
In such environments we would normally see traditional Value underperform as mean reversion is more challenging to achieve in turbulent markets. However, Dividend Yield often outperforms as investors become more conservative and seek to bolster their portfolios with income. Momentum, Profitability and (large) Size tend to outperform as well.
However, this environment has been more akin to the Tech bubble with expensive Growth stocks leading the market down again. Value is outperforming as this downturn continues. In our view, this may possibly be explained by interest rates. This dataset only goes back to 2005 and thus excludes other scenarios where a sharp rise in inflation drove an S&P 500 selloff, but current inflation is being combatted with interest rate hikes, which in turn increase the discount rate for Growth stocks that have a lot of their earnings growth in future years. This decreases their present value, making Value stocks relatively more attractive. In light of this inflationary backdrop, it is perhaps not surprising that Value stocks have outperformed during this downturn.
Figure 1. Ranked S&P Quarterly Index Performance Since 2005
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Source: MSCI Barra, Man Numeric, Bloomberg; as of 30 June 2022.
Figure 2. Factor Performance in All Versus Negative S&P 500 Months Since 2005
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Source: MSCI Barra, Man Numeric; as of 30 June 2022.
What Value Has Been Performing?
A key narrative of 2022 has been the continued Value rally. After more than a decade of pain, Value investors have finally been rewarded. But not all flavours of Value have fared the same, so what kind of Value has rallied the most? Looking through a Barra lens, it is perhaps not surprising that the defensive Dividend Yield factor led the way in both developed and emerging markets in the extreme down market we saw in the first half of 2022. This was followed by the deeper value Book to Price factor and then the Earnings Yield factor, which posted healthy positive performance despite trailing the other two.
At the index level, Value has performed well in all major geographic regions, once again with some variation. Value has been firmly in favour in Japan in particular, with the MSCI Japan Value Index outperforming the MSCI Japan Growth Index by over 23% YTD. Europe and the US have also seen a significant preference for value stocks over growth stocks. Value’s outperformance of Growth at the index level has been healthy in Emerging Markets too but less of a dominant theme there.
As Value versus Growth index returns are heavily influenced by having very different sector exposures, perhaps it is most instructive to analyse how Value has fared as an approach to stock selection. Looking at top-and-bottom quintile model spreads using Man Numeric’s multi-faceted Value model, one sees a similar pattern of Value being in favour across regions. Once again, Japan is where Value has been most in favour, followed by US small cap stocks. Emerging markets were less favourable for Value than developed markets by this metric too, but by a smaller margin than when looking at Value versus Growth at the index level.
Figure 3. Regional Value Returns – QTD and YTD
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Source: Man Numeric; as of 30 June 2022.
Figure 4. Value – Growth Index
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Source: Man Numeric; as of 30 June 2022.
With contributions from: Daniel Taylor (Man Numeric – CIO), John Lidington (Man Numeric – Client Portfolio Manager and Co-Portfolio Manager), Eric Wu (Man Numeric – Principal, Quantitative Alpha Integration and Strategy) and Nina Gnedin (Man Numeric – Associate Portfolio Manager)
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