The performance of different investment styles and factors diverged by region in May, having performed almost identically to each other in the first quarter.
Analysis of factor performance by Style Analytics found a clear rotation back to value stocks and a boost for momentum stocks in May.
Its outperformance across subfactors ranged from 80 basis points on a book-to-price basis to 130 basis points on a cash flow-yield basis. The performance was compared with the U.S. equity market's gain of 30 basis points.
Momentum stocks also made a comeback with up to 70 basis points of outperformance vs. the market, having lost favor late last year as the value rotation took place.
In Europe, stocks performed differently to U.S. equities — a contrast to the first quarter when factors moved in step with one another. Almost every subfactor outperformed across every factor in Europe, with the only exception being low leverage stocks, which underperformed European equity markets by 10 basis points.
Value outperformed in Europe by between 30 basis points and 70 basis points, depending on the subfactor, while growth stocks also outperformed by up to 60 basis points of return over equity markets.
In Australia, growth and quality stocks dominated with up to 130 basis points of outperformance over the equity market for the growth factor and up to 150 basis points of outperformance for quality. High volatility and momentum stocks suffered.
For emerging markets, there was no strong outperformance across any single factor except for high-volatility stocks. Value, growth and quality stocks all performed within 50 basis points of the market, although high-volatility stocks outperformed by between 20 and 100 basis points.
The return of the value factor in the U.S. is not a surprise given the election of President Joe Biden, the country's COVID-19 stimulus package and general inflationary pressure, said Damian Handzy, head of research, in an email. "We expect the outperformance of value to continue," he said.
Regarding the momentum trade in the U.S. in May, Mr. Handzy said "momentum lists have more value names than growth names and it is picking up. It has become a proxy for value." He expects the factor to continue to do well as long as value does. "When there is a rotation away from value, momentum will get 'confused' and will underperform until another factor becomes dominant," he said.
Since Europe is "economically similar to the U.S.," executives would have expected similar dynamics. The outperformance of value, growth, quality, momentum and volatility stocks in the region "is a bit surprising," Mr. Handzy said.
The disconnect between the first quarter's similar performance vs. May's divergence reflects "uncertainty about how the world is dealing with the pandemic, with different regions using various response strategies. The divergent factor performance is reflective of the many different approaches being used with varying levels of success," Mr. Handzy added.
