Author Details

Abhishek Gupta

Abhishek Gupta
Executive Director, MSCI Research

Ashish Lodh

Ashish Lodh
Vice President, MSCI Research

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Momentum on a Value Hunt

  • Driven by strong performance of the value factor and relative weakness of growth for the past six months, the MSCI Momentum Indexes rebalanced into securities with higher value and lower growth characteristics.
  • Notwithstanding changes in exposure to other style factors, the momentum factor remained the MSCI Momentum Indexes’ highest factor exposure.
  • The momentum factor exploits performance rotation in other style factors, countries and sectors. Reviewing momentum in conjunction with other factors can be instructive to investors and aid in asset allocation.

Driven by strong performance of the value factor and relative weakness in growth for the past six months, the MSCI Momentum Indexes rotated into securities with higher value and lower growth characteristics and experienced major shifts in sector and country exposures. Momentum, by definition, rotates into securities with recent outperformance, regardless of other factor, sector or country exposures. That said, investors who view value (what is cheap) and momentum (what is trending up) as contra-signals may have questions about the value-momentum convergence, as well as the divergence of momentum and growth.

The MSCI Momentum Indexes tracking U.S., developed-market (DM) and emerging-market (EM) equities rebalanced with a one-way turnover of 67%, 64% and 54%, respectively, at MSCI’s May 2021 Semi-Annual Index Review. That compares to the long-term historical averages of 48%, 49% and 42%, respectively. As expected, the indexes rebalanced into securities with higher momentum characteristics, but also delivered higher value and lower growth exposure. We look at what drove these shifts by reviewing recent factor performance and how momentum has interacted with other factors.

 

Factor Reversal

The gradual reopening of economies since the announcement of a COVID-19 vaccine in November 2020 marked a turning point in the performance of many factors. More specifically, all value factors — book-to-price ratio, earnings yield and long-term reversal — showed strong performance over the last six months, compared to the year prior, across the U.S., DM and EM. In contrast, considerations such as higher inflation expectations have hurt the performance of growth companies.

Additionally, while DM saw a reversal in the momentum factor, EM continued to be a momentum play. Further, higher-beta stocks delivered lower performance over the recent six-month period.

 

Pure Factor Returns

Pure factor returns using MSCI Global Investable Markets Equity Model (DMEMUS).

 

Momentum: A Chameleon Factor?

As a result of changes in relative factor performance over the past six months, securities with higher value exposure started to exhibit higher momentum characteristics, as can be seen in the increase in value-momentum correlation in the exhibit below. Simultaneously, poor performance in growth, low-volatility and quality stocks decreased their momentum characteristics.

It’s important to note that momentum has reshuffled between factors in the past. The low-volatility-momentum correlation spiked in 2008, followed by a value-momentum correlation spike in 2009. And while the current factor correlations may appear extreme, they are similar to other short-term spikes observed over the last 15 years. In addition, even with this shift, momentum continues to have a stronger correlation with growth compared to value.

 

Momentum vs. Other Style Factors

Cross-sectional correlation of MSCI FaCS exposures for developed-market securities.

 

What Did the Recent Factor Rotations Mean for the MSCI Momentum Indexes?

The exhibit below shows select factor exposures for the MSCI Momentum Indexes, before and after the May 2021 Semi-Annual Index Review. While momentum remained the dominant factor in the indexes across all regions, its exposure increased. Value exposures also increased, though were relatively muted (and still negative in the case of EM). Further, exposure to the growth, quality and low-volatility factors, in general, declined in all regions.

 

Select FaCS Exposures for MSCI Momentum Indexes

 

Shifts in Sector and Country Exposures

Momentum also experienced shifts in sectors and countries. Exposure to the financial sector increased significantly in all three regions owing to the sector’s rally in the first quarter of 2021. Bullish commodity markets provided tailwinds to the materials sector in EM, which led to its increased allocation in the MSCI EM Momentum Index. In contrast, consumer discretionary, health care and information technology were laggards in the U.S. and DM, resulting in lower weightings in the respective MSCI Momentum Indexes.

 

Select Sector Exposures for MSCI Momentum Indexes

On a country level, the MSCI World Momentum Index’s allocation to the U.S. dropped by about 8%, bringing down the index’s high active U.S. exposure. China’s representation in the MSCI EM Momentum Index dropped to 30% from 56%, whereas Taiwan nearly doubled its weight as it outperformed EM equities as a whole, on the back of strong global demand for its semiconductor exports.

 

Select Country Exposures for MSCI Momentum Indexes

World Momentum Before RebalancingAfter Rebalancing
US77.9%70.1%
France1.1%4.4%
Japan6.2%3.7%
Canada2.4%4.2%
UK0.8%2.4%

 

EM Momentum Before RebalancingAfter Rebalancing
China56.7%30.2%
Taiwan12.3%23.7%
Saudi Arabia0.3%4.8%
Brazil3.3%6.3%
India7.8%10.7%

 

Taking Momentum Shifts in Stride

Changes in economic regimes and market conditions can favor different style factors, sectors and countries, and this can prompt momentum to rotate among them. Momentum may seem to be on the hunt for securities with higher value characteristics right now, but that’s because value is winning. If that changes, momentum will set its sights elsewhere. It is important to understand not only the nuances of momentum, but how it interacts with other factors. Regardless of market conditions, a holistic view on factors remains critical to gain unique portfolio insights.

 

 

Further Reading

Value Springs into Action

Riding on Momentum

Regulation