Factors Turn Bizarro Across Global Markets

By David Garff, AccuVest Global Advisors President

In 2014, we wrote a paper about multifactor investing at a global level. The original paper can be found here and here.

Our conclusion was that using a combination of strong fundamentals (ROE), high momentum (three-month total return in local currency), lower risk (decreasing semi-standard deviation) and cheap valuations (high earnings yield) could improve the performance of a global equity portfolio. This makes intuitive sense.

Surely buying assets that are cheaper is better than paying too much for them. Stocks with stronger fundamentals must generate better earnings, which in turn should drive stock prices. And it is almost taken as a truism that stocks with better relative strength will continue to outperform. Each of those factors had delivered solid outperformance versus the benchmark (as well as an equal-weight portfolio) over a long horizon. However, in 2014, that outperformance had started a three-year downturn.

Performance Factors Fade

Since that paper was published, we have seen a continued deterioration in the performance of factors across the globe. Most of the historic relationships have flipped. As we see in Exhibits 1 and 2, expensive countries have outperformed.

Countries with poor fundamentals have outperformed. Pursuing momentum strategies has punished portfolios. Countries with bigger downside moves have been rewarded. It seems we are in a bizarro world of factors, or for you who are fans of “Stranger Things,” it appears that we are in the Upside Down.

Exhibit 1: