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Waman Virgaonkar

Waman Virgaonkar

Vice President, MSCI Research

Hitendra D Varsani

Hitendra D Varsani

Managing Director, MSCI Research

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Markets in Focus: Half-Time – Keeping it Real and Defensive

  • Global equities were down 20% in the first half of 2022 – the worst six-month start to a year since 1975. For the second quarter of 2022, the MSCI Enhanced Value and High Dividend Yield Indexes delivered positive active returns across regional markets.
  • To navigate an environment characterized by high volatility, rising rates, rising inflation and quantitative tightening, indexes linked to real assets, defensive sectors and factors might be constructive.
  • MSCI’s Adaptive Multi-Factor Allocation Model points to an overweight in low volatility and momentum as of June 30, 2022.

Investors faced a challenging market environment in both equities and fixed income in the second quarter of 2022, including rising rates, slower growth, the start of quantitative tightening by the U.S. Federal Reserve and Russia’s continued invasion of Ukraine added to inflation woes. Additionally, corporate earnings remained at risk with companies facing higher input costs, labor shortages and continued supply-side disruptions. Analysts have revised earnings downward and this has put pressure on market valuations (as shown below). The MSCI ACWI Index was down 15.5% for the quarter. In this blog post, we take a closer look at real assets, defensive sectors and factor indexes as investors navigate what might be a prolonged period of volatility and uncertainty.


Downward revision to earnings could weigh on market valuations

Period from Dec. 31, 1994, to June. 30, 2022. The average earnings revision ratio is calculated as the average of the earnings revision ratio of all the stocks in the MSCI ACWI Index. The earnings revision ratio is computed as the weighted average value of the ratio of the number of earnings up-revisions minus the number of earnings down-revisions to the total number of earnings forecasts used to compute the earnings consensus for the last three months.


Rotation to low-risk, value and quality stocks

Over the second quarter, the challenging market environment led investors to continue to avoid high-risk stocks in favor of low-risk, value and quality. The top portion of the exhibit below shows the pure-factor performance of MSCI’s Global Equity Factor Model over the second quarter. Value and quality stocks delivered stronger performance than other styles, while high-risk stocks continued to falter. In our previous blog post, we detailed how high-risk stocks have been under pressure following crowding signals that stemmed back to the end of 2020. The MSCI Factor Crowding Model continues to show that high-beta stocks are crowded. In addition, the price of crude oil rose over 5.5% to $105.76 a barrel, while making a peak at about $121 a barrel, so it came as no surprise that the oil and gas industries fared well (as shown in the bottom portion of the exhibit below).


Pure-factor performance for style and industry groups

Performance of the MSCI Global Equity Factor Model pure factors from March. 31, 2022, to June. 30, 2022. Only the top- and bottom-10 factors from industries are shown.


Who let the bears out?

Equities worldwide continued their slump with the MSCI ACWI Index ending the first half of 2022 down 20%, moving into bear-market territory. Value and small size, which were overweight in the MSCI Adaptive Multi-Factor Allocation Model as the quarter began, had positive active returns, whereas quality which was underweight, had negative active returns (as shown below). Their performance was driven by rising rates, central bank tapering and higher inflation. Defensive factors, low volatility and yield delivered the highest positive active returns in a number of regions, particularly in U.S., while quality and momentum struggled due to exposure from high-beta stocks. Quality indexes were also underweight strong-performing oil stocks; negative value exposure also contributed to its underperformance.


Low volatility, yield and value indexes outperformed


The table shows regional variations of the MSCI Minimum Volatility Index (USD), MSCI High Dividend Yield Index, MSCI Quality Index, MSCI Momentum Index, MSCI Enhanced Value Index, MSCI Equal Weighted Index and MSCI Growth Target Index, from March. 31, 2021, to June. 30, 2022. The bar chart shows the active returns of the same indexes, by region, for each month in the quarter, as well as for the full quarter.


Market conditions from a historical perspective

Given the turbulent environment that is replete with war, inflation, higher rates and volatility, we researched how real asset indexes, defensive sectors and factor indexes performed in comparable environments. While investors face scenarios that cannot absolutely be replicated, a comparison of these regimes may illuminate market conditions that resemble the current environment. For example, we observe the high volatility present from 2002 to 2003 following the bursting of the technology bubble, as well as the Iraq War. We also detail the annualized active returns of the selection of indexes below in various historical periods for added context. As our research indicates, most of the defensive indexes have been robust in these periods of uncertainty.

  High Volatility
(Oct. 2000 -
March 2003)
Higher Rates
(May 2004 -
July 2007)
Quantitative Tightening
(Oct. 2017 -
March 2019)
Higher Inflation/Rates/Vol
(Nov. 2021 -
June 2022)*
Valuations (Fwd P/E)
Current 20-yr
World -18.5% 16.3% 5.0% -16.9%
14.5 14.9
  Anualized Active Returns
Real Assets  
World Agriculture & Food Chain 15.1% 0.0% -0.1% 20.7%
14.8 17.6
World Commodity Producers 11.5% 18.2% -1.3% 37.2%
  6.9 12.6
World Infrastructure -4.6% 5.3% -0.4% 20.5%
14.9 15.2
World Real Estate 9.7% 11.3% 4.7% 3.9%
24.3 23.0
ACWI IMI Timber Select Capped 15.0% -9.4% -10.3% 6.5%
10.0 14.7
World Minimum Volatility (USD) 7.2% -1.7% 3.8% 9.9%
17.1 16.5
World Enhanced Value 6.9% 12.3% -6.0% 10%
  7.9 10.8
World High Dividend Yield 7.8% 4.4% -0.4% 15.9%
12.1 12.8
World Quality 2.4% -3.8% 5.1% -4.0%
17.1 16.5
World Defensive Sectors 3.8% 0.2% 1.5% 18.6%
14.3 15.7

*Not annualized


MSCI Adaptive Multi-Factor Allocation Model

Our adaptive multi-factor framework is a model designed to analyze factor-based decisions. Our research shows that factors were sensitive to changing market conditions and may suggest the value in taking a holistic approach to factor assessment. This approach encompasses not only the macroeconomic environment as shown above, but factor valuations, recent performance trends and risk sentiment.

As of June 30, 2022, our Adaptive Multi-Factor Allocation Model showed the following exposures across the four pillars:

  • Macro Cycle: Overweighted quality, low volatility and momentum with signals from the Chicago Fed National Activity Index, Federal Reserve Bank of Philadelphia’s ADS Index and PMI all pointing to a slowdown.
  • Valuation: Overweighted value and momentum based on the valuation gap compared to an equal-weighted factor mix in the context of nearly 30 years of a factor’s history.
  • Momentum: Selected low size, yield and low volatility based on relative performance over the last three months.
  • Market Sentiment: Showed an overall neutral allocation to all factors due to selection of opposite set of factors from the indicators - an upward-sloping (normal) VIX term structure and widened credit spreads.

At the end of the second quarter of 2022, the MSCI Adaptive Multi-Factor Allocation Model showed a slight overweight to low volatility and momentum and a slight underweight to value and yield, relative to an equally weighted factor mix (as shown below).


Exposures from MSCI’s Adaptive Multi-Factor Allocation Model

As of June 30, 2021. Positive exposures are denoted as + or ++, negative as - or -- and neutral as N.





Further Reading

Markets in Focus: Who Let the Bears Out?

Factors in Focus: Disentangling Market Gyrations Through the War

Factors in Focus: Are Your Equity Styles Ahead of the Curve?

Factors in Focus: Impact of Inflation on Style Factors

Factors in Focus: Where’s the Value in Defensive Positioning?