BOJ Rate Hike Sparks Global Factor Turbulence

Market Summary

US Market: 8/2/2024 - 8/8/2024

• It was a rough week for US headline indices, as they all ended in the red. The Nasdaq led the decline with a -3.11% drop, followed by the S&P 500 at -2.34%, and by the Dow which closed at -2.23% over the five trading days ending Thursday.
• The Bank of Japan's decision to raise interest rates caused market turbulence entering this most recent week. JPMorgan speculates that the BOJ might not raise rates further this year, while the ongoing unwinding of policies adds to the volatility and growing pessimism about Japanese stocks.
• After Monday's selloff, stocks are set to close the volatile week on a positive note. On Thursday, the S&P 500 posted its largest one-day gain since November 2022, with US futures and European markets also showing gains. Treasuries Yields are slightly lower than the dollar and the Yen has started to rise again.

Extreme Movers Portfolio Performance

Note: Extreme Movers definitions can be found in Factor University on our website.

US Extreme Movers Volatility and Factor-Driven Speedometers

• The US Extreme Movers portfolio saw a return of 26.5% this week landing in the “Very Volatile” category. This places this week in the top percentile on a training-twelve month basis and the 95th percentile since inception.
• Factor returns were high this week showing a return of 35.8%, earning the “very Factor-Driven” classification. This return placed this week in the 90th percentile for TTM and 82nd percentile since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme movers portfolio also saw high volatility at 19.2%. This places this week in the 98th percentile for TTM and 84th percentile ITD.
• Returns were very factor driven for the European portfolio as well at 37.3% which marks the 89th percentile for TTM and 86th percentile since inception.
  
  

US Extreme Movers Portfolio Exposures

• Information Technology fell heavily out of favor this week in the US Extreme Movers portfolio with a 31% short allocation. Semiconductors & Semiconductor Equipment made up a 20% short on its own, leading tech to its 4th percentile since inception.
• The Food Products and Household Products industries combined for 12% of the 17% long allocation to the Consumer Staples sector. That allocation marks the 98th percentile on both a trailing-twelve-month and inception-to-date basis.
• Along with Consumer Staples, Health Care represented the largest week-over-week reversal, moving from a 7% short to a 15% long allocation. Biotechnology accounted for a 6% long while Health Care Equipment & Services followed at 5%.

• Beta factors fell strongly this week, due in large part to the short allocation to Information Technology. Barra’s Beta factor fell to one of its lowest levels since the US Extreme Movers portfolio’s inception in 2007.
• Value and Quality factors reached elevated levels relative to Growth factors as Monday’s market sell-off resulted in investors favoring “safety”. Barra’s Earnings Quality factor reached its 94th percentile on a trailing-twelve-month basis and their Dividend Yield factor climbed to the 95th percentile on both a TTM and ITD basis.
• The long allocations to Energy, Real Estate, and Utilities drove a significant anti-Oil Beta and anti-Interest Rate Beta positioning which means that stocks that tend to benefit from higher rates and commodity prices underperformed across the market.
• Wolfe’s HF Crowding factor fell to its bottom decile over the trailing twelve months which hints at the fact that popular hedge fund longs experienced increased downward pressure during the sell-off. The Short Interest factor was also strongly negative however so hedge fund managers likely saw some relief from crowded shorts.

International Extreme Movers Portfolio Exposures

• Banks and Insurance stocks made up the majority of this week’s 16% short allocation to Financials in the International Extreme Movers portfolio. More than 10% of that short allocation was concentrated in Japan following the Bank of Japan’s surprise interest rate hike.
• Health Care stocks in Hong Kong and China drove the sector to the top of the long book. The 15% allocation was the highest of the trailing year and was made up primarily by Health Care Equipment & Supplies and Pharmaceuticals.
• Similar to the US portfolio, the long allocation to Consumer Staples was led by stocks in the Food Products industry. The 12% sector allocation marks the 97th percentile on a trailing-twelve-month basis. Brazil and Hong Kong were the top country contributors.

• Both Beta and Residual Volatility factors fell sharply in ex-US markets this week, noting strong risk aversion from international investors. The long allocations to Consumer Staples, Utilities, and Health Care accounted for most of the negative exposure.
• The lone positive style factors were Axioma’s Dividend Yield factor and Profitability factors from Axioma and Barra. During the heightened global market volatility, investors heavily sold less profitable stocks with a particular focus on Japanese Financials.
• Wolfe’s Short Interest exposure reached its top decile on a trailing-twelve-month basis which points to the fact that popular short stocks strongly outperformed the market, likely causing challenges for hedge fund managers in crowded names.

International Extreme Movers Portfolio Country Exposures

The chart presents the portfolio's exposures to various groups in the Developed and Emerging Markets, highlighting the three most notable country contributors for each respective group's allocation.

• The turmoil from the Bank of Japan’s rate hike sent the Japanese allocation all the way down to -33%; its 3rd percentile over the trailing twelve months. That led to an overall Developed Markets allocation of -21%.
• EM Asia fared better with a 17% long allocation, led by China. Health Care stocks lifted China to its 83rd percentile since inception.
• Brazil saw a 12% long allocation which marked its 96th percentile on a trailing-twelve-month basis. All sectors in Brazil were positive but Consumer Staples and Financials were particularly favored, making up almost half of the 12%.

Regards,
Jose