INSIGHTS Market Insight
As with nearly any trend, be that the latest flared jean or music album, they are ‘cool’ until they aren’t. The same holds true for financial markets. Momentum performs well during trending markets. The most recent decade (2010-19) witnessed the longest bull market in history with global equities returning an average annualized return of +8.5%. It is therefore no surprise that it has been a ‘trendy’ decade with MSCI Momentum achieving an average annualized return of +11.9%.
The Covid-19 pandemic further enhanced Momentum’s performance as investors piled into stocks that were net beneficiaries of ‘working from home.’ However, the announcement of successful vaccine trials at the end of 2020 led to a change in investor sentiment. Investors’ appetite for risk returned with the expectation of economies re-opening. A rotation in market leadership ensued with cyclical stocks outperforming their defensive counterparts. Year to date, Energy and Financials stocks are up 22.5% and 12.5%, respectively, whilst Tech stocks are lagging, up only 2.6%.
Rotations in market leadership are not conducive to the success of traditional Momentum based strategies as portfolios must re-align themselves with the latest trend. As can be seen below, the prevalence of cyclical sectors in a 6-month Momentum basket has been increasing since the first vaccine announcements (November 2020). Financials, Energy and Materials now carry a 4x heavier weight than they did back in October 2020 in favour of tech stocks which have halved in weight.
Whilst there are shoots of the same effect in a 12-month Momentum basket, the risk-on rotation is not yet mature enough for value stocks to feature so prominently in longer-term Momentum portfolios. However, as we go 12-months past the 8-year Value ‘low’ (23rd March 2020), it is likely that this will change, as a longer-term more established trend is formed.
Given the severity of this rotation, it is no surprise that Momentum strategies have suffered this year with MSCI Momentum displaying a -15% drawdown. As investors with Momentum strategies, we remain hopeful that this may be the start a new longer-term trend that will provide us with the market conditions conducive for successful Momentum investing
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