As we recently said in our post, systematic factors have historically been sensitive to macroeconomic and market forces but not in the same way. For example, some, such as Value, Momentum and Size have been pro-cyclical, meaning they outperformed when economic growth was rising. Quality and Low Volatility were more defensive, outperforming in a weak macro environment.
What we observe is that despite growth and inflation figures being somehow muted recently, many institutional investors are concerned about a very significant positive/negative shock in the future.
To this end, we have developed a framework to provide institutional investors with a structure to help classify investment strategies along their short-term and long-term exposures to macroeconomic shocks.
The MSCI Asset Pricing Model follows the principle of modern asset pricing: the competitive equilibrium value of an asset equals the expected discounted value of current and future asset cash flows.
Macro risk has an impact on valuation and risk via two channels: cash flows and discount factors.
Our finding is that the cash flows earned by different equity portfolios have responded differently to persistent shocks to real output, and that these differences emerged over longer time horizons.
Because asset cash flows responded only over a long horizon, this is a long-term risk. The model showed Momentum, Value Weighted, Equal Weighted and Risk Weighted exhibited high sensitivity to real GDP growth risk relative to the capitalization weighted index in the long-run. Large positive shocks to economic growth could have a greater positive long-term impact on the return to these indexes: they could potentially command higher long-run average returns or premia. We label these portfolios "growth sensitive."
Long-horizon investors who have greater tolerance for macroeconomic uncertainty might consider tilting towards high growth sensitive portfolios relative to the capitalization weighted portfolio, especially if they perceive the outlook for real economic growth to be positive.