REITs Tumble on Credit Fears
US Market: 3/17/2023 - 3/23/2023
- It was another mixed week for the US headline indices. The Nasdaq posted the strongest performance again, returning 0.6% in the five trading days ending March 16th. The S&P 500 followed at -0.3%, and the Dow ended at -0.4%.
- Stocks declined on Wednesday following the Fed’s decision to proceed with a 25 basis point rate hike amid the ongoing banking turmoil, which Fed Chair Powell admitted had somewhat impacted the softening policy.
- Deutsche Bank’s stock fell dramatically during Friday’s trading session after the cost of credit default swaps spiked, signaling increased credit risk for the German bank
Extreme Movers Portfolio Performance
Note: Extreme Movers definitions can be found in Factor University on our website.
US Extreme Movers Volatility and Factor-Driven Speedometers
- This week, the US Extreme Movers portfolio cooled down slightly to "Volatile" territory. The portfolio returned 16%, which falls in the second quintile of historical volatility.
- Factors remained the primary drivers of volatility in the US markets. Factors accounted for 34.2% of this week's performance, categorized as "Factor-Driven" by landing in the second quintile historically.
- Since the beginning of 2022, forty of sixty-three weeks have been categorized as either "Factor-Driven" or "Very Factor-Driven," which presents fundamental investors with a particularly challenging environment from which to drive alpha through stock-picking.
International Extreme Movers Volatility and Factor-Driven Speedometers
- International markets were much calmer this week relative to the US. The International portfolio returned 15.5%, which slides into a “Neutral” volatility category.
- Factor influence also fell into “Neutral” territory, as 25% of the portfolio’s return was attributable to common market factors. Although there was a higher proportion of alpha-moving stock prices this week, there were lower levels of volatility than in prior factor-driven weeks.
US Extreme Movers Portfolio Exposures
- Information Technology and Real Estate were the top stories this week. Information Technology’s 18% long allocation was in the top quintile since inception (2007), and the 46% short allocation to Real Estate marks its lowest level since inception.
- All industries within Information Technology saw positive allocations, led by Semiconductors which contributed to half of the 18% allocation. Real Estate was led almost exclusively by a negative allocation to Equity REITs.
- Financials returned to positive territory this week, with a 9% allocation, landing in the top quartile over the past 12 months. This surge resulted from a significant allocation to Capital Markets, which offset the continued negative allocation to Banks.
- Utilities swung from a 'significantly positive' to a 'significantly negative' allocation this week, landing in the bottom decile since inception. Allocations to Electric Utilities and Multi Utilities led the move.
- This week's portfolio was mostly long Volatility and Beta factors. These positive exposures came from long and short books and were led by Real Estate, Consumer Discretionary, Utilities, and Information Technology allocations.
- Growth outweighed Value this week, with Growth allocations landing in the top decile over the past twelve months and since inception. Growth was driven most significantly by allocations to Information Technology and Real Estate.
- Dividend Yield was out of favor this week, primarily driven by the short allocation to REITs.
International Extreme Movers Portfolio Exposures
- The International Extreme Movers portfolio had similar allocations to its US counterpart, with Communication Services, Consumer Discretionary, and Information Technology leading the long allocations. Real Estate led the short side, ranked as the most significant in the past twelve months and at the 2nd percentile ITD.
- Japan and Australia had the most significant negative allocations to Real Estate. At the same time, Hong Kong, the United Arab Emirates, the Philippines, and Saudi Arabia were the only countries with positive allocations. Two-thirds of the negative allocation to Real Estate came from Equity REITs.
- Financials returned to a positive allocation this week, driven by several European countries, including the United Kingdom and Switzerland (both significantly negative the week prior). Positive allocations to Capital Markets and Banks were behind this shift. In contrast, Japan maintained a significant negative allocation to Financials, driven by Insurance and Banks.
- Utilities swung to a negative allocation, landing in the bottom quintile ITD. Two-thirds of this allocation was driven by Electric Utilities, most notably in Brazil and Hong Kong.
- European and Asian countries generally contributed to the long book, while Japan, Hong Kong, Brazil, and China took the lead in the short book. Japan alone accounted for over 20% of the short side of the book, driven by sizable short allocations to Industrials and Financials.
- Volatility exposure came down this week, with high-volatility stocks allocated to the short side outweighing those allocated to the long side. In contrast to last week, Beta exposure was in the top quintile ITD, driven by negative allocations in Japan, Brazil, and China. This positive exposure suggests that investors bet heavily against low Beta names.
- The negative allocation to Value continued and came mainly from the short book, indicating that investors avoided cheaper stocks, particularly in Japan, Germany, and South Korea.
- Growth exposure leaned positive as investors rotated away from more defensive sectors like Health Care and Utilities and towards cyclical sectors like Consumer Discretionary and Information Technology. The positive allocation came from the long and short books, indicating that investors favored high-growth names and bet against low-growth names.
- As investors shorted popular short names, HF Crowding and Short Interest saw prominent negative exposures falling in the bottom quintile since inception. Japan had the most prominent negative allocation to both factors, driven as expected by Financials and Industrials.