With global policy rates ratcheting higher amid inflationary pressures, market participants are looking closely at the impacts of interest rate movements on various parts of their portfolios, including Value equity. Research shows that the relationship between the Value factor premium1 and interest rate fluctuations has strengthened significantly since the global financial crisis (Figure 1).2
This rising correlation seems to lend support to a popular view that Value investing is simply an interest rate bet. Many prior literature, on the other hand, find that such correlation does not hold steady over time, and over the past decade, some other Value-related ratios (such as dividend yield) have exhibited a much weaker relationship with rates. However, prior literature fails to provide any fundamental reason for the changing correlations and tends to attribute them to simple statistical randomness.
"In our view, the recent strong correlation between the Value factor premium and rates is likely driven by changes in sector concentration in Value style indices."
The financial sector has become more concentrated in the top book-to-market quintile (i.e., the deepest Value quintile), and as a result, the interest rate beta3 of the book-to-market factor has risen.
1In this case, with Value measured by book-to-market ratio (i.e. BP), which is similar to the high-minus-low or HML factor as in the Fama-French five-factor model.
2Maloney, Thomas and Moskowitz, Tobias J., Value and Interest Rates: Are Rates to Blame for Value’s Torments? (May 22, 2020). Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3608155.
3Interest rate beta is measured as the expected excess return (%) to the factor in response to a 1% move in ten-year US government bond yields.
Important Risk Information
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
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.
This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions and analyses made by SSGA in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances, many of which are detailed herein. Such statements are subject to a number of assumptions, risks, uncertainties, many of which are beyond SSGA’s control. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.
The views expressed in this material are the views of Tao Wang through the period ending June 15, 2023, and are subject to change based on market and other conditions.
“A “quality” style of investing emphasizes companies with high returns, stable earnings, and low financial leverage. This style of investing is subject to the risk that the past performance of these companies does not continue or that the returns on “quality” equity securities are less than returns on other styles of investing or the overall stock market.”
The value style of investing that emphasizes undervalued companies with characteristics for improved valuations, which may never improve and may actually have lower returns than other styles of investing or the overall stock market.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a 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.
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.
This communication is directed at professional clients (this includes eligible counterparties as defined by the appropriate EU regulator who is deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.
Index are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
©2023 State Street Corporation – All Rights Reserved
Tracking code: 5875498.1.1.GBL.INST
Expiration Date: 31/08/2024