Report: February 2023 Factor Performance Analysis

Alex Lustig | March 17, 2023

Back to Value (and Momentum)

Market Background

Equities slid after a particularly strong January. From a factor perspective, investors favored Value stocks although Quality outperformed as well in many regions.

A year after the Federal Reserve officially began raising rates at a record pace, inflation persists in the United States and worldwide. Although the Fed previously said the disinflationary process “has begun”, the CPI index plateaued in January, remaining at the elevated level seen in December.

Contrary to the Fed’s previous statement, further rate increases will likely be higher than anticipated last month, according to the latest Fed meeting minutes from February 1st.

MSCI Europe performed the best with just -0.83% correction while the S&P 500 fell by -2.61% in February. MSCI Emerging Markets struggled after a strong January, falling by a whopping -7.66%

After two back-to-back months of -30% price corrections, natural gas prices began to level out, increasing by about 2.5% this month. Crude Oil prices have fallen just -51 bps this month, stabilizing at $77/gallon.

Treasury Yields continued their ascent, after Jerome Powell confirms that the fight with inflation is not complete and will require larger and more frequent rate hikes. The U.S. 10 year-yield surpassed 4% this month. The 10-year GILT trails the U.S. yield at 3.8%, and the German 10-year yield increased by a similar proportion to 2.7%

Gold lost all its January gains, underperforming the S&P again. Bitcoin increased by a further 3% after gaining nearly 40% last month, outperforming the MSCI Europe by nearly 400bps.

Factor Summary

  • US Equities: Yield continued to underperform, and Volatility outperformed again to a smaller degree alongside Quality.
  • Europe: Value led the region. Volatility underperformed after a strong January, and stability focused Quality subfactors outperformed.
  • Emerging Markets: Defensive environment -Volatility underperformed, Value and Yield the only to outperform the market.
  • Canada: High Quality outperformed with some Value metrics, but especially Momentum and shareholder yield.
  • UK: Mirrored Europe except Yield underperformed and forecasted growth outperformed instead of dividend growth.

US Equities

In January, Volatility surprisingly took lead over other factors even amidst economic uncertainty. This trend has continued throughout February as well, but to a significantly smaller degree than last month.

The largest factor premiums observed were market beta and three-year volatility, both delivering approximately 80 basis points of outperformance largely driven by Tesla and NVidia, respectively outperforming the market by about 30% and 27%, this month.

Considering the continued inflation concerns, stocks with low levels of debt outperformed this month as the low gearing subfactor delivered 60 bps of outperformance over the rest of the US market.

Following low gearing, other Quality subfactors like return on equity and net profit margin outperformed. Yield continued underperforming after a strong 2022, while Value and Growth delivered no significant over/under performance.

Figure 1: February 2023 US Factor Performance (sector adjusted).
Source: Investment Metrics, a Confluence company

European Equities

Europe has largely avoided a prolonged energy crisis after securing oil from Norway, Texas and Qatar, but concerns over a rebounding Chinese economy tapping into its new energy sources now looms the region.

Not only did the European market slightly outperform the U.S. again, but factors also performed very differently in the region. After a brief period of outperformance from Volatility in January, investors have pivoted to a slightly more defensive position.

Value and Yield subfactors outperformed alongside Quality measures like earnings/sales growth stability, which tend to outperform during market downturns. The largest driver of outperformance was exposure to the earnings yield subfactor, led by equities like UniCredit, Christian Dior, and STMicroelectronics. Alongside Yield, investors also focused on large cap companies with a strong dividend growth.

Figure 2: February 2023 EAFE Factor Performance (sector adjusted).
Source: Investment Metrics, a Confluence company

Emerging Markets Equities

After a strong January, equities in Emerging Markets realized a greater downturn than Developed Markets. However, from a factor perspective the two regions had similar ranges of over/underperformance at approximately +/- 100 basis points.

Similarly to Europe, investors also pivotted away from risky stocks with high short term volatility and back into mature stocks with a strong dividend yield. As the factor perfomance trend shifted back to Value as it did in late 2022, high momentum stocks also outperformed.

A rebounding Chinese economy has driven a large part of the outperformance in the region, especially companies with a high dividend yield and dividend growth rate like Alibaba and NetEase.

Figure 3: February 2023 Emerging Markets Factor Performance (country and sector adjusted). Source: Investment Metrics, a Confluence company

Canadian Equities

In Canada, equity markets were down about four percent. January’s top performing subfactors -book to price, three year volatility, and sales growth- all underperformed by about eighty basis points.

Investors focused their attention on high quality stocks that have been paying down debts and buying shares back as shareholder yield outperforms although dividend yield dragged the market.

All quality subfactors outperformed, especially companies with strong earnings and sales growth stability. Small-mid cap equities also outperformed large cap equities.

Figure 4: February 2023 Canada Factor Performance (sector adjusted).
Source: Investment Metrics, a Confluence company

UK Equities

The United Kingdom’s equity markets outperformed the US and Europe, largely driven by Value in the form of earnings yield and cash flow yield. The region’s factor performance trend has synced up with Europe’s trend as Quality and Momentum also outperformed alongside Value.

The UK still differs from Europe from the perspective of forecasted growth vs dividend growth, as the latter outperformed in Europe alongside dividend and shareholder yield while investors focused their attention on companies with higher forecasted growth then the market.

Momentum 12-1 and earnings yield and cash flow yield were largely driven by the same companies as in January, led by companies like Lloyd’s Banking Group and Barclays, but this month also by mining company Rio Tinto.

Figure 5: February 2023 UK Factor Performance (sector adjusted).
Source: Investment Metrics, a Confluence company

Appendix: How to read the charts

Each factor’s performance is based on the relative performance of that specific factor’s top 50% of stocks (by market cap) compared to the overall market (the sole exception is the Size factor which uses the top 70% of stocks). For example, for the first factor, Book-to-Price, we determine the period’s performance of the basket of stocks with the highest Book-to-Price values relative to the total market.

Each factor is analyzed independently, market and fundamental data are adjusted so that the sector-average (within each country) relative data is used, and the performance measurement isolates the factor’s contribution to return. For example, in Figure 2, US stocks with a high book-to-price (i.e., high-value stocks as measured by book-to-price) underperformed the broad US market by 110 bps on a sector-adjusted basis.


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