Style Research recently released Q3 2017 Factor Performance Results. The article below recaps the live presentation by Bernie Nelson on October 10, 2017. Detailed reports and the webinar recording are also available.
The Q3 2017 Style Research Factor Performance update focused on dominant factor results across the world’s major markets.
Across all regions, the strongest factor performances in a generally strong quarter for equities were high forecast growth, high estimate revisions, and momentum when the overall results are adjusted for country and sector biases.
Hunt for Growth Drives Developed Markets
The best performing factors in Developed markets were:
- high forecast earnings growth
- high forecast earnings estimate revisions
- high beta
- high momentum
This is consistent with a continued late cycle bull market with a scarcity of earnings growth and investors struggling to find further growth opportunities.
Although higher dividend yield stocks underperformed, other value factors were fairly neutral over the quarter. Companies with more stable returns and with stable forecast earnings underperformed as investors focused on growth and momentum. There was a small bounce back in value factors in September while growth underperformed, but this was not enough to change the year-to-date weakness in value or strength in growth. Given the weight of the US market within the developed markets, one hypothesis is that Trump’s recent announcement on tax reform may have rekindled the reflation trade that was hot last year.
High Forecast Earnings Growth Drives US
The quarterly results for the US were almost identical to Developed markets. This is not surprising given the dominant weight of the US in Developed markets. Again, strong market relative performance came from high forecast earnings growth, high estimate revisions, high beta, and high momentum. High forecast earnings growth was the best performing growth factor in the US, driven by stocks such as Facebook, Apple, NVidia, Boeing, and AbbVie.
Value Also Running With Growth In Europe
Similar to Developed and US, high forecast growth, high estimate revisions, and high momentum were the strongest factor performers. However, value was also positive alongside growth, and especially noticeable in high cash flow yield and high sales to price. Europe also saw a bounce back in value in September, with earnings yield performing more strongly in September compared with Developed or US. A longer term analysis of high forecast estimate revisions in Europe, within sectors and countries, confirmed strong market relative outperformance over the past 20 years. A valuation analysis across a range of factors showed that the high forecast estimate revisions are not currently that expensive.
Hidden Value in China’s Domestic Market Changes EM Perspective
High forecast growth, high estimate revisions, and momentum were even stronger in Emerging markets than Developed, US, and Europe. Value stocks were also generally weak. However, a study of the domestic China “A” shares market revealed that value factors had strongly outperformed in that market over the past year, a result that is overlooked when using more common indices for China or Emerging markets. This reveals a strong contrast of investor sentiment between the US and domestic China A shares. Investors may be nervous about further economic growth in the US and cautious of late cycle weakness. But there is an underappreciated strength of confidence in the Chinese domestic market. And as the domestic Chinese market becomes increasingly accessible to investors, it will be interesting to see if value investors start to invest more heavily in China as a result.
Get the Full Picture
Get the complete analysis of which specific factors contributed to results in the Style Research Q3 2017 Factor Performance Study. Click here to access the full recording of the webinar and request various regional reports.