Rate-Friendly Stocks See Boost on Global Inflation

David Bromberg

Product Solutions Associate

Mar 5, 2023

Mar 23, 2023

Note: Extreme Movers definitions can be found in the Factor University section on our website.

Despite a late-week recovery, US headline indices ended in the red again this week. The Nasdaq fell by -1.1% from Friday through Thursday. The S&P and Dow followed at -0.8% and -0.5%, respectively.
Inflation reports in Europe followed the US this week with hotter-than-expected results. French inflation reached a record 7.2% which will likely guarantee a 50 bp ECB hike this month.
Bonds were walloped this week as global yields rose. The US 10-year treasury yield breached 4% on Thursday, while the German 2-year Bund yield rose above 3% to its highest level since 2008.

Extreme Movers Portfolio Performance

The US Extreme Movers portfolio returned 16.8%, which lands in "Volatile" territory for the fourth consecutive week.
Factors quieted slightly this week and made way for alpha as the portfolio moved into the "Factor-Driven" category. 26.9% of the portfolio's return was attributable to systematic factors, which landed in the second quintile of weeks since January 2007.
Elevated levels of both volatility and factor influence were particularly prevalent in 2022. In our January 8th edition of Factor Spotlight, we highlighted that 59% of weeks in 2022 matched the behavior we saw in the US market this week.

This week, volatility in the international market picked up a bit as the International Extreme Movers portfolio returned 14.4%, which lands in the "Neutral" volatility quintile.
Unlike its US counterpart, the International portfolio pointed, once again, to an "Alpha-Driven" environment, which means that factors had less influence on stock returns than they have historically, opening up an opportunity for fundamental investors.

The US Extreme Movers portfolio saw one of the most significant allocations to the Industrials and the Materials sectors since we started to collect data in January 2007, at the 98th and 96th percentile, respectively.
The overweight allocation to the Industrial sector mainly came from Capital Goods, while the Materials sector's overweight allocation was distributed across its underlying industries.
The Communication Services, Real Estate, and Utilities sectors experienced poor performance, ranking in the bottom decile TTM. The Media Industry had the most significant negative impact on Communication Services, while REITs were the primary cause of the poor performance in Real Estate. Electric Utilities was the most negatively affected Industry within the Utilities Sector.

This week's US portfolio's Volatility and Beta exposures drifted closer to zero, suggesting that investors were more willing to take on more risk than the previous week.
Crowded hedge fund shorts continued to benefit managers, with this week's Short Interest exposure still at one of the lowest ITD and YTD levels.
Value, particularly Earnings Yield, still showed favoritism from investors, although Growth stocks did see a resurgence in the portfolio, landing close to the top quartile, both YTD and ITD.
A high Interest Rate beta exposure suggests investors' expectations of persistent interest rate hikes have renewed following last week's Fed minutes release and hotter-than-expected inflation reports. Consequently, investors fled to stocks with a positive relationship with interest rates, most notably Energy stocks. Similarly, investors piled into stocks with a positive correlation to Oil prices. The top contributor, unsurprisingly, is the Oil, Gas & Consumable Fuels Industry.

The International Extreme Movers Portfolio differed significantly from its US counterpart, with the top and bottom allocations in the Financials and Healthcare sectors, respectively.
The Banks Industry in Europe and Asia was primarily responsible for the strong long allocation in the Financials sector following a massive spike in yields.
The short allocation to the Healthcare sector cannot be attributed to any particular geographic location or industry, as most countries and industries contributed to the short side of the book.
Within the Utilities sector, all industries contributed to the short side of the book, with a robust negative allocation to Electric Utilities across multiple regions.

SLike its US counterpart, the International Extreme Movers Portfolio exhibited similar week-over-week behavior with exposure to Volatility and Beta rising to above-average levels.
The preference for Value versus Growth faded this week, with Value exposure landing much closer to its year-to-date mean. This is a sharp contrast to the heavy overexposure seen last week.
Popular long positions, mainly across Asian countries and led by Hong Kong, delivered headwinds to investors’ long side of the book.
Interest Rate Beta exposure was led by the Financials sector, particularly long positions in the Banks Industry across Europe and India.

Regards,
David

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