Global factor views: Improved stock-picking conditions and ‘Quality’ appears in favour

However, as we move into early 2023, we have a more positive outlook because Quality tends to outperform when macro momentum is weak or slowing (as it is now) but also fares well in recovery phases - see Chart 2.³

In addition, interest rates are close to peak, meaning the de-rating headwind experienced by Quality Growth is likely to be behind us. Finally, a weak macro backdrop combined with optimistic earnings expectations increase the risk of negative earnings surprises, but high-quality companies should be less exposed to this risk. While macroeconomic and earnings views underpin our positive outlook for this factor, we would note that Quality remains relatively expensive, which argues in favour of an active approach to avoid expensive stocks.

Value: Neutral

Rising interest rates drove a market wide de-rating in 2022, where higher duration - i.e., Growth stocks -suffered most, but Value stocks - those which appear to be trading for less than their underlying value - outperformed. The rotation towards Value and away from Growth in 2022 was the largest one-year rotation since the 2000 technology bubble burst. Value’s strong performance last year was driven by a wide valuation gap between Value and Growth stocks - see Chart 3 - and the dominant performance of the energy sector. 

As we go into 2023, we are neutral on Value because the valuation spread with Growth is now closer to its long-term average and with interest rates now close to peak levels, we do not expect the same de-rating headwinds for Growth stocks. However, we remain neutral on Value because while we may be close to peak rates, we also don’t expect rates to fall quickly. A more benign Value-Growth style environment should lead to improved conditions for stock selection.

Momentum: Negative

With Momentum, the aim is to capture stocks which have had a positive price change relative to the market over the last 12 months. This factor endured a volatile 2022, initially suffering from a reversal in fortune for growth sectors such as technology but it was subsequently buoyed as it became increasingly exposed to the energy sector. As we start 2023, we have a negative outlook for price Momentum because it has become a crowded trade and highly exposed to the energy sector. But in the absence of a serious deterioration in geopolitics, the recent significant excess performance of the sector is unlikely to persist, and this may weigh on the performance of Momentum. With market-wide earnings forecasts looking optimistic, our preferred measure of investor sentiment is earnings revisions.

Low Volatility: Neutral

The Ukraine war damaged global growth expectations, sent inflation soaring and dampened investors’ risk appetite in 2022. Against that backdrop, it should come as no surprise that Low Volatility (or low beta) stocks outperformed the market in 2022. But in 2023 expectations of slowing economic growth continues to argue in favour of the defensive attributes of the style. However, we remain neutral because Low Volatility is not cheap and the style is relatively crowded, which creates downside risk under a market recovery scenario.