2024 Year in Review International Markets

TLDR

International markets saw similar levels of alpha to the US in 2024, unlike in 2023 when there was a large divergence.‍

• 29% of the weeks in 2024 were at least “Factor-Driven” (compared to 31% in the US).
• 46% of the weeks were at least “Alpha-Driven” (compared to 45% in the US).
• Both levels were almost identical to what was seen in 2023.

Similar to the US, International markets also saw elevated volatility in 2024, with the percentage of volatile weeks increasing two-fold from 2023. ‍

• 55% of the weeks were at least “Volatile” (compared to 61% in the US)
• Only 15% of weeks were at least “Calm”, compared to 35% in 2023.

Similar to the US, the Momentum factor had a return of 9.17% - the highest ever annual gain for this factor in our recorded history (since 2008).‍Other notable highlights:‍

• International investors were cautious: Investors flocked to Value while Residual Volatility, a proxy for measure risk aversion, remained strongly negative in both up and down markets.
• Investors prioritized stocks that benefit from higher interest rates: Interest Rate Beta saw positive average exposures in both up and down markets. In addition, Interest Rates emerged as an outperforming factor in 2024, achieving a 4.64% return that marked the highest return observed since 2008.
• Sector exposures remained relatively stable across varying market conditions, unlike in the US where they see-sawed: Financials emerged as the top sector in the Extreme Movers portfolio, while Materials and Consumer Staples spent most of the year short.

Factor Influence and Market Volatility Review

2008 - Present: Classifying “Factor-Driven” and “Alpha-Driven” Markets

‍This analysis will focus on the global market using our International Extreme Movers Portfolio. The portfolio is a weekly-rebalanced, market-neutral portfolio that invests long in the top decile of best performers and shorts the bottom decile of performers in the MSCI ACWI ex-US index. The characteristics and performance of the Extreme Movers Portfolio point to the areas of the market that were in and out of favor and provide valuable insight into themes that drove stock returns.

Our International Extreme Movers portfolio began on April 1, 2008. Each week, we observe performance decomposition through the lens of various risk models and use quintiles to categorize the performance on a spectrum of the most “Alpha-Driven” weeks to the most “Factor-Driven” weeks. To calibrate our classification, we took the total sample of all weeks (>870) since April 1, 2008, and ranked them by Alpha Contribution to return percentage.

‍A Very Alpha-Driven Week (Top Quintile) is one where an Alpha Contribution to return is HIGH and a Very Factor-Driven Week (Bottom Quintile) is one where Alpha Contribution to return is LOW.

‍Below are the Alpha Contribution thresholds that define the quintiles:

In addition to understanding what portion of the market volatility was attributable to factors and alpha, we also need to proxy the market volatility levels. We applied the same ranking methodology to categorize the volatility of weekly periods based on the total return of the International Extreme Movers portfolio. We categorized these quintiles from “Very Volatile” to “Very Calm.”

To break down the historical context, we segmented the historical data by calendar year and market regime to give investors a sense of how the recent and current market stack up against prior periods. Details on the thematic market regimes are below.

Aggregating Weeks into “Alpha-Driven” vs. “Factor-Driven” Periods‍

The availability of alpha in the markets is critically important to fundamental investors. Historically, there have been periods during which the majority of volatility in the market was attributable to stock-specific nuances. These periods provide ample opportunity for stock-pickers’ competitive advantage to shine. There have also been periods that were clouded by market factors, restricting the fundamental investor’s ability to drive idiosyncratic returns. Here, we’ve broken down the weeks in each year since 2008 according to our spectrum of “Very Factor-Driven” to “Very Alpha-Driven” and examined the percentage of weeks in each category.

We found that only 29% of the weeks in 2024 were at least “Factor-Driven.” This was consistent with the level seen in 2023, and aligned closely with what was seen in 2021 as well as several Post GFC + Pre-COVID years (namely 2012 to 2014, and 2018). On the other end of the spectrum, 46% of the weeks in 2024 were at least “Alpha-Driven,” which was again consistent with 2023, and aligned closely with 2014 and 2018. This distribution suggests that bottoms-up, fundamental stock-pickers in international markets were very similarly positioned to their US counterparts over this past year to uncover opportunistic stocks that were not over-influenced by market and macroeconomic forces.

When comparing the year to past market regimes, we can see that 2024 presented more alpha opportunity than any of these periods. The Post-GFC + Pre-COVID regime was the most similar, with 43% of at least “Alpha-Driven” weeks overall, as compared to 46% of weeks in 2024. That said, the “Very Alpha-Driven” weeks in 2024 exceeded this regime by 6%. The level of at-least “Factor-Driven” weeks in 2024 was also significantly lower than any other period, with the Post-GFC + Pre-COVID regime having 8% more weeks in the factor-driven categories, 4% of which were “Very Factor-Driven”.

Aggregating Weeks Into Volatile vs. Calm Periods

‍In addition to the breakdown of performance into factor and alpha, another key area we looked at was the level of volatility. The charts below aggregate each week since 2008 on a scale of from "Very Calm" to "Very Volatile," across calendar years and market regimes. We found that the International portfolio saw similar elevated volatility to the US in 2023, with 13% of weeks being classified as "Very Volatile" and 42% as "Volatile". In aggregate, this was double the amount of volatile weeks in 2023, though it still falls more than 10% short of the levels observed from 2020-2022. We also saw only 15% of at least "Calm" weeks in 2024, which aligned closest with the years of 2009, 2020, and 2021.

Relative to recent market regimes, the “Volatile” periods in 2024 were most similar to Q4 2018, which saw the highest percentage of volatile periods of any regime. That said, the combined “Volatile” and “Very Volatile” periods in 2024 remained much lower than Q4 2018 and other elevated periods like the GFC, COVID, and Rate & Inflation Downturn. The percent of at least “Calm” periods in 2024 was one of the lowest observed, with only the GFC and Rate & Inflation Downturn periods having fewer periods of calm. Interestingly, the 29% of “Neutral” weeks in 2024 was the highest observed.

‍Elevated Volatility with Factor Influence

‍To deepen our analysis of the International Extreme Movers portfolio, we examined the cross-section between considerably factor-driven and considerably volatile periods over the past year to understand how often the international market was heavily volatile because of factors. The intersection of these categories represent periods where alpha is far less available, but stock prices are experiencing significant price movements, creating a challenging environment for fundamental investors.

The chart below presents the percentage of weeks each year categorized as at least "Factor-Driven" and at least "Volatile." This highlights that much of the elevated volatility in international markets was indeed factor-driven volatility, with 2024 exhibiting double the percentage of weeks as 2023. The increase was seen in "Volatile & Factor Driven" periods, which were up 11% from the year prior, while "Very Volatile and Very Factor-Driven" weeks remained constant at 6%. Of the periods in our analysis, 2024 was most similar to 2021.

Compared to past regimes, the percent of factor-driven volatile weeks in 2024 was the lowest observed besides the Post-GFC + Pre-COVID period. This period was the most similar, but had 5% fewer “Volatile & Factor-Driven” weeks than 2024.

Finally, given the elevated volatility in the International Extreme Movers portfolio, we also examined periods where elevated volatility was driven by alpha - i.e. periods that were rich in opportunity for fundamental investors. This lens clearly showed that 2024 held ample opportunity for fundamental investors, with the 23% of weeks classifying as “Alpha-Driven“ and ”Volatile“. This is almost a two-fold increase from 2023, and has only ever been exceeded in 2008 and 2021.

Extreme Movers Exposure Analysis

Sector‍

In 2024, sector exposures in international markets showed distinct differences compared to the U.S. markets. While U.S. markets experienced more pronounced variations between up and down markets, international sector exposures remained relatively stable across varying market conditions.

Financials emerged as the dominant sector in the portfolio, holding the highest average allocation at 4.1%. This marked Financials as the top allocation for the year, a trend consistent across both up and down markets. Financials also spent the highest percentage of weeks in a long position, reflecting its continued favorability throughout the year.

Industrials followed with the second-highest long allocation at 1.3%, maintaining a consistent long position regardless of market conditions. This allocation showed minimal change compared to its 2023 allocation of 1.1%, indicating steady favor for the sector in international markets.

Utilities experienced a slight decline compared to 2023, with its allocation dropping by 0.3% to -0.1%. However, the narrative shifted significantly this year: while Utilities were relatively consistent across market conditions in 2023, they became out of favor during up markets in 2024 (-0.7%) but saw increased favor in down markets (1.2%). During down weeks, Utilities ranked as the second-largest long allocation.

Materials continued its decline from 2023, with a further drop of -1.0%, culminating in the lowest allocation in the portfolio at -2.3%. The portfolio maintained a short position in Materials across both up and down markets, contrasting sharply with 2023, when the sector held the second-largest long position during up weeks.

Consumer Staples had the second-lowest allocation at -1.4%. The sector displayed a unique pattern, holding the lowest allocation during down weeks and spending the most weeks in a short position. Notably, like Utilities, Consumer Staples exhibited a reverse directional split, achieving a positive allocation during down markets. This marked the second consecutive year of this behavior, with Consumer Staples also demonstrating the largest delta between market conditions at 3.4%.

‍Style‍

In 2024, international investors exhibited heightened caution, mirroring trends observed in U.S. markets. This caution was evident in the negative average allocations to both beta and volatility factors. A significant departure from 2023 was the persistence of this cautious stance even in up markets. Notably, Residual Volatility, a common proxy for risk aversion, recorded the lowest allocation during up markets, underscoring this heightened risk-averse sentiment.

As investors steered away from risk, they poured into Value. Value was consistently favored throughout the year and was one of the most favored style factors in the portfolio during up markets. This contrasts with 2023, when interest in value stocks during up markets was relatively muted.

Among macro factors, Interest Rate Beta saw positive allocations in 60% of the weeks in 2024. Investors prioritized stocks that benefit from higher interest rates, and unlike 2023—when enthusiasm for such stocks was largely confined to down markets—interest in these stocks persisted across both up and down market conditions in 2024.

Crowding factors gained favor during down markets, reflecting a defensive approach as investors sought safety in consensus plays during downturns, underscoring a year that was characterized by pervasive caution amongst international investors.

‍Country‍

In 2024, there was a continued bias toward Developed Markets, although the gap was minimal. Developed Markets held an average allocation of 3.3%, placing in the 50th percentile since inception, while Emerging Markets recorded an average allocation of 2.9%, ranking in the 51st percentile ITD.

Within Developed Markets, Asia-Pacific emerged as the strongest region with an average allocation of 1.84%, primarily driven by Japan (1.86%). Israel stood out with a .26% allocation which was in it’s 67th percentile historically. Beyond Israel, the top countries in each Developed Market region generally maintained allocations consistent with their historical averages.

Emerging Markets, however, presented a more varied picture. The Americas experienced a weak year, as below-average allocations for Brazil and Mexico dragged the region to the 41st percentile ITD. In contrast, standout performers included India, with a 2.97% allocation ranking in the 82nd percentile ITD. The UAE also registered a strong performance, with a 0.29% average allocation which ranked in the 76th percentile, while Malaysia also surpassed the 70th percentile for its historical average allocation at 0.46%.

Style Factor Returns Spotlight

Similar to the US markets, Momentum saw exceptional performance in the international market this year, achieving a 9.17% return — the highest ever return since 2008. This marks a significant departure from the factor’s historical average of 2.68%. The strong performance was driven by sectors tied to Artificial Intelligence, which thrived in 2023 and continued to see gains in 2024.

The Growth factor performed particularly well relative to past periods, which have generally shown this factor to be negative. The 2024 return landed in the 81st percentile since 2008, exceeding its historical average by 1.94% and making it the highest return since 2020. Another factor that has historically trended negative in the international markets is Size - meaning that small cap stocks have generally outperformed large cap stocks - with an average return of -1.36% from 2008 to 2023 in the Axioma Worldwide model. In 2024, we saw similar behavior to 2023, with a positive deviation from this trend that resulted in a return of 2.03%.

Interest Rates also emerged as an outperforming factor in 2024, achieving a 4.64% return that marks the highest return observed since 2008. The factor exceeded its historical average by 4.17%, as the market showed preference to beneficiaries of rising rates over the course of the year, with a particularly strong rally in the last quarter of 2024.