Equity factors made a dramatic U-turn in September, capturing the mercurial and rapidly shifting appraisal of economic prospects across global markets. But we think it’s too early to call this a regime change.
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With the attention of investors being increasingly focused on sustainability issues, awareness of Environmental, Social and Governance ratings characteristics is essential, as it enables a better overview of their meaning.
Data since the Global Financial Crisis (GFC) demonstrates that the link between factors and economic cycles is broken—and in effect, the traditional “Investment Clock” framework for explaining factor behaviour is no longer applicable. If we look to evolve this thinking for the post-GFC period, we find in our recent paper that economic volatility regimes have a significant impact on factor payoffs.
When US equity markets reached the bottom one year ago at the onset of the pandemic, US microcap stocks were dealt a particularly sharp blow. They subsequently rebounded alongside all US equity market cap segments, but their performance continued to lag their larger size segment counterparts—until the events of early 2021 when US microcaps soared above the rest.
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