BofA with the note:
A rare month of broad-based Value factor leadership
As our US Regime Indicator advanced further into “Mid-Cycle” in March, Value saw broad leadership: seven of the best performing factors overall were Value factors, a first in our factor performance history since 1986. Value tends to outperform in Mid-Cycle (leading the index in 75% of these periods, historically), and so far since the start of the current Mid-Cycle in Jan., this group has gained 18.5%, leading the index by 7.2ppt and Growth by 9.1ppt, in both cases the third-widest return margin in our history.
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10 reasons the Value cycle isn’t over yet
Value underperformed Growth early in April, raising the question: Is the Value cycle over? We don’t believe so, and see multiple reasons for the Value cycle is to continue, such as Growth is still 1 St. Dev. overvalued vs Value; Value have only outperformed Growth for 7months (when it typically leads for 33, on avg.); active managers are 30% underweight Value; the profits cycle (a key Value driver) isn’t expected to peak until 4Q 21 by our numbers; our US Regime indicator remains in Mid-Cycle; and valuation dispersion remains near records. MTD, Value made up almost all of earlier weakness vs Growth(+2.7% vs +2.8%, as of 19 Apr close). Among other factor groups, MTD, Quality has fared best (+3.6%), while Momentum (+1.7%) and Risk (+0.9%) have lagged most. Amid peak stimulus, we expect a transition from low quality to high quality leadership.
Rotation from Deep Value to Mid-Cycle Value
A rotation away from deep value leadership was seen last month, as Jan-Feb’s best-performing Low Price/Book factor (+6.3% in Mar.) was eclipsed by Low EV/EBITDA (+9.4% in Mar).Price/Book remains the best performing factor year-to-date (YTD,+24.9%), but EV/EBITDA is likely to deliver better results in coming months, as this factor beat the index in the 75% of previous Mid-Cycle phases, faring better than deep value factors like Low Price/Book and Low Fwd P/E with a 63% hit rate each.
Dividend Yield fared well, but rates might weigh in 2Q Corporate CashDeployment factors (+6.7% in Mar.) were the only group besides Value to beat the index last month. High Divided Yield (+7.7%) fared best, while High DividendGrowth (+5.4%) lagged the index. As interest rates rise, short duration stocks(i.e. bond proxies), as well as long duration stocks (i.e. secular growth) tend to underperform, and we favor medium duration stocks with stable and growing dividends. YTD, Cash Deployment (+16.3%) is third best performing factor group after Risk and Value.
Momentum and Risk lagged in March, as Small Caps led
High flying leaders of the previous12 months suffered most in March, as the High 12-month Price Momentum factor was the weakest factor overall (-0.4%). The group might be at an inflection point as Momentum factors continue to align themselves with new leadership and participate in the Value cycle. Risk factors also underperformed in March (+3.9%), but led other factor groups in 1Q (+22.3%). Risk is likely to remain among the leaders in coming months, as the group tends to fare well in Mid-Cycle.