Via Damien Boey at Credit Suisse:
Last week, we updated our views on volatility.
Our initial thesis was that volatility would spike, consistent with the equity risk premium rising faster than the risk free rate, supporting defensives over cyclicals. We also suggested that levered passive funds would de-risk and de-lever in a higher volatility environment, causing tighter financial conditions and slower economic growth, undermining the efficacy of value factors. After all, during de-leveraging episodes, asset prices drive earnings (lower), rather than the other way around, making it hard to trust in the anchoring properties of naïve value factors. Therefore, we were long momentum and quality, and zero-weight on value.