November of 2021 revealed a new period of monetary policy reassessment and an increasingly hawkish Fed. The end of the month brought a significant new concern with the discovery and spread of the Omicron variant of COVID-19. And while uncertainty about Omicron dominated the news cycle, markets were more focused on inflation and monetary policy. Fed chairman Jerome Powell suggested to US lawmakers that it was time to stop referring to inflation as “transitory.”
Let’s look at the impact of these events on factor returns. From mid-year through mid-November, Value had declined as market participants extrapolated low interest rates and accommodative monetary policy into the future. Over the same time frame, high-beta stocks did quite well (see Figure 1).
Figure 1 : Cumulative Factor Returns: Value and Risk (Beta) - 2021 Year-to-Date
We have posited for some time that a return of some inflation, and a consequential increase in interest rates, would be good for Value strategies, and indeed the market has responded this way — Value has rebounded meaningfully since mid-November.
However, we also recognize that the path out of the pandemic will be bumpy, caused both by the fear of setbacks to economic growth from new variants (which could lead to further lockdowns) and uncertainty about the monetary policy response (whether it will strike the correct balance between economic growth and inflation).
As a result, among factors Value and Risk have seen the biggest volatility during November, whereas Quality and Sentiment, which have been strong throughout the year, did not take a breather at all.
The Bottom Line
The emergence of the Omicron variant and its potential to slow down the economy reminds us that markets can take a dive when (1) valuations are high and (2) scary things happen, so the AQE team continues to have a Value discipline when selecting high-quality companies with positive investor Sentiment. This balances the return opportunity with expected volatility.
Our most preferred segments, therefore, are Consumer Staples Retailers in the US, Telecoms in Asia-Pacific, Pharmaceuticals in the US and Europe, Health Care Equipment and Services in the US, and Diversified Financials in the US.
Our least preferred segments include Household and Personal Products, Consumer Services, and Transport, in all regions, as well as Media and Software in the US.
About State Street Global Advisors
Our clients are the world’s governments, institutions and financial advisors. To help them achieve their financial goals we live our guiding principles each and every day:
Start with rigor
Build from breadth
Invest as stewards
Invent the future
For four decades, these principles have helped us be the quiet power in a tumultuous investing world. Helping millions of people secure their financial futures. This takes each of our employees in 30 offices around the world, and a firm-wide conviction that we can always do it better. As a result, we are the world’s fourth-largest asset manager* with US $3.86 trillion† under our care.
* Pensions & Investments Research Center, as of December 31, 2020. † This figure is presented as of September 30, 2021 and includes approximately $59.84 billion of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.
For use in EMEA: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Important Risk Information
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The views expressed are the views of Active Quantitative Equity through December 9, 2021, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal. Quantitative investing assumes that future performance of a security relative to other securities may be predicted based on historical economic and financial factors, however, any errors in a model used might not be detected until the fund has sustained a loss or reduced performance related to such errors.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
This website is intended for persons resident in Australia. State Street Global Advisors, Australia Services Limited ABN 16 108 671 441, AFSL Number 274900 ("SSGA, ASL") is the product issuer. State Street Global Advisors, Australia, Limited (AFSL Number 238276, ABN 42 003 914 225) (“SSGA Australia”) is the Investment Manager. The material on this website is general information only and does not take into account your individual objectives, financial situation or needs.
You should seek professional advice and consider the Product Disclosure Statement (PDS) and target market determination, available at www.ssga.com, before deciding whether to acquire or continue to hold units in the Funds.
You can access our PDS online or by calling us. The offer made in our PDS is available to persons receiving the PDS within Australia and applications from outside Australia will not be accepted. Past performance is not a reliable indicator of future performance. Investing entails risks and there can be no assurance that State Street Global Advisors will achieve profits or avoid incurring losses.
Investing involves risk including the risk of loss of principal. This material should not be considered a solicitation to apply for interests in the Funds and investors should obtain independent financial and other professional advice before making investment decisions. There is no representation or warranty as to the currency or accuracy of, nor liability for, decisions based on such information. Performance quoted represents past performance, which is not a reliable indicator of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.