Factor Rotations: Evidence from global equity markets
Developed Markets
There has been quite a bit of style rotation going on in global markets since 2016. After a strong relative performance from value factors in 2016, growth factors have been the driving force in developed markets so far in 2017. Return premiums have been negative across most popular value factors with cash flow yield being the most negative.
Apart from ROE, most historical and forward growth factors have experienced positive returns in 2017 for the Global DM. Premiums to both short and medium term momentum factors has also been negative. Over the past 12 months though, value style factors have comfortably beaten growth style factors. On the other hand, momentum and quality styles have lagged quite notably. Negative returns premiums to medium term momentum factor has been as low as -5.4 percent relative to the index.
Emerging Markets
Realised factor and style premiums across the EM have been much more consistent. While growth factors have lagged so far in 2017, past 12 months and three years; value, growth and quality factors have produced strong positive premiums. The main story over the past 12 months and three years has been the outperformance of value style. Within value style, returns to book yield, earnings yield, Cash flow yield and EBITDA yield have been particularly strong.
Momentum factors have also been very strong and across both short (6 month) and medium (12 month). Within quality, stability of returns have been well rewarded relative to the index.
Australia
Style and factor rotation in Australia have followed the developed market patterns. After a strong relative performance from value factors in 2016, growth factors have been the driving force in developed markets so far in 2017.
Return premiums have been negative across most popular value factors with cash flow yield being the most negative. These results are highly consistent with our observations in the developed markets. Most of the historical and forward growth factors have experienced positive returns in 2017. Unlike the results from Global developed market, ROE in Australia has been well rewarded in 2017.
Premiums to both short and medium term momentum factors has been negative over the past 6 months, 12 months and 36 months. Over the past 12 months though, value style factors have comfortably beaten growth style factors. Quality factors have been flip-flopping between 2016 and 2017. YTD quality factors experienced negative premiums except low accruals. Over the past 12 months though, stability has been well-rewarded particularly in sales, earnings growth and accruals.