The Global Search for Growth

Continuing our exploration of the worldwide vs. US models, we're starting a series where we'll examine the factor characteristics and trends within broad global indices. This week, we'll start by examining Growth factor trends in key countries to better understand the country selection movements that are likely to follow.

Before we begin, here's a quick rundown of market and factor trends that we've seen over the past week in the US model.

US Market

‍3/01/19 - 3/07/19

The market experienced a sizable pullback over the past week as the S&P 500, Dow, and NASDAQ closed lower for 5 straight sessions, erasing nearly any trace of February's strong finish. Investor fears of a slowing global economy were exacerbated as the ECB cut growth forecasts for the Eurozone, China reported disappointing February export data (-20.7% YoY), and the US added only 20k jobs in Feb vs. the expected 180k. It wasn't all negative as US wage growth rose 3.4% YoY, the fastest clip in 10 years.

Here's an update on how some key factors have changed in the US model over the past week, using our normalized return indicator:

Most factors saw weakness over the past week, with Profitability being the biggest loser right behind Market Sensitivity, which continued its rapid fall from the extreme heights it had reached just a few weeks ago. Growth, Volatility, and Earnings Yield (a component of Value) also sold off, while Size and Momentum saw some normalized gains.

Growth Around the World

‍We're exploring factor trends in the ACWI index within our worldwide model. The first factor we'll look at is Growth, which is incidentally a major concern for most investors at this juncture. For our purposes, Growth factor is defined as historical sales and earnings growth blended with estimated sales and earnings growth.

‍Methodology: We took the constituents of the MSCI All Country World Index (ACWI) and identified which companies had a +1 or -1 exposure to Growth in the global model. We then created an equal-weighted long/short Growth portfolio out of the names that achieved that criteria, then charted exposure to the factor at the country level.

‍Let's explore a few countries through this lens, in order to better understand how they tracked in their net Growth exposure historically.

‍United States - 4/1/08 - 3/7/19

The US saw a rally in Growth during the initial rebound from the Global Financial Crisis, then fell well into negative Growth territory in May 2010. Starting in July 2010, the US saw a sustained rebound in Growth until hitting a crescendo in October 2015, and then tumbling back into negative territory during the “Factormageddon” of early 2016. We can see that the Q4 2018 downturn was fairly muted in terms of reported and forecasted earnings growth in the US, and most recently the US is relatively improving in its global growth standing.

China - 4/1/08 - 3/7/19

The most important bellwether of global growth, China hit two peaks during this period, once in 2012 and then most recently right before the factor selloff of Jan 2016. It's safe to say that on a net basis in the ACWI, China exhibits the growth characteristics we would expect it to. At its current level of 0.04, Chinese exposure to growth in this index is roughly equal to that of the US as of 3/1/19.

Japan - 4/1/08 - 3/7/19

Long considered to be a graveyard for growth, Japan has actually been trending in a positive direction over the past decade, and at current levels represents a much better Growth investment than it had been deemed in the past. In fact, since reaching positive territory, Japan has only touched negative Growth exposure once — and briefly at that — in May 2017.

Canada - 4/1/08 - 3/7/19

On the other side of that coin we see that over the past decade, Canada has progressively moved from having extremely high exposure to Growth to firmly living in the negative Growth zone. This can most likely be attributed to the decline in oil pricing and Canada's reliance on commodities as a growth engine.

‍Current Picture & Conclusion

‍Based on a recent snapshot taken on 3/6/2019, here are the countries currently with the highest and lowest relative growth positioning in the ACWI Index:

While every investor has an idea of the growth story in each of these countries, it's always helpful to be able to chart the relationship over time to have a better idea of where capital can be allocated, provided a factor thesis. At the moment, it's interesting to note that the US and China are roughly on par in terms of exposure to Growth. Meanwhile, Japan has steadily been climbing as a growth economy, while Canada has seemingly done the opposite. In a market currently obsessed with the robustness of the global economic engine, we'll continue to follow these trends and may even try to construct a framework that takes these inputs in order to see if tracking exposure might help in asset allocation.

Next week, we'll take a similar look at Value to see if we can help investors identify opportunities to buy Value at the country level.

Regards,
Omer