US Banks Show Signs of Life

US Market: 5/12/2023 - 5/18/2023

• After a strong close the week prior, US headline indices continued to increase through Thursday’s close. The Nasdaq finished at 3.2%, while the S&P and Dow followed at 1.9% and 0.7%, respectively.
• This week, investors were positioned for a risk-on market, with futures and treasury yields ticking higher. This came as investors grew more confident in strong corporate earnings and that a deal could be agreed upon as soon as this weekend to raise the US debt ceiling and avoid a potential default.
• The Federal Reserve rate continues to be in debate as investors speculate that there could be a rate cut this year, despite the Fed pushing back against bets that a pivot could come as soon as September. Following the 25 basis point hike earlier this month, the market is pricing around a 63% probability that the Fed will pause its cycle of tightening in June.

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 posted a return of 16.5% this week, which lands in the 76th percentile of all weeks since January 2007.
• This week marked a return to a “Factor-Driven” environment as idiosyncratic, stock-specific volatility accounted for only 72% of the portfolio’s return.
• The alpha influence this week fell into the 37th percentile since inception, in contrast to the past two weeks of historically elevated levels of alpha. This muted result comes as attentions shift to macroeconomic concerns around US debt and interest rates.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The international markets remained similarly volatile to last week, with the International Extreme Movers portfolio returning 15.9%.
• Market dynamics differed from the US with only 17.4% of that return being driven by market factors, resulting in a “Very Alpha-Driven” week. This marks a level of alpha volatility that hasn’t been seen since June 2021, making this week a desirable environment for fundamental-focused international managers.

US Extreme Movers Portfolio Exposures

• Sector flows were much more pronounced this week than they were last week. Information Technology and Financials were in the 95th and 94th percentile of allocations since inception, respectively. Software and Semiconductors drove Information Technology, while a big rally in Banks accounted for the majority of Financials.
• Utilities and Real Estate were down across their entire sectors this week. Utilities’ 20% short allocation landed in the 3rd percentile since inception.

• The US Extreme Movers portfolio maintained its elevated levels of exposure to beta and volatility factors which typically point to a “risk on” sentiment in the market.
• While the portfolio still leaned slightly into growth factors, there was a sizeable shift in value. Earnings Yield factors presented a mirror image of what they’d been last week and moved into the top decile of exposures since the portfolio’s inception. This was largely caused by the long allocation to Banks.
• Unprofitable companies were out of favor this week as short allocations to Utilities and Consumer Discretionary stocks drove positive exposure to profitability factors.
• From a macro perspective, the bank rally pushed Interest Rate Beta exposure to its 80th percentile since inception.

International Extreme Movers Portfolio Exposures

• While both the US and International portfolios were long Information Technology, the biggest disparity came from the fact that the International portfolio was entirely neutral on Financials. The long allocation to tech was focused primarily in semiconductor stocks in Japan and Taiwan.
• Metals & Mining stocks in Hong Kong and China accounted for the majority of the 10% short allocation to Materials which landed in the 11th percentile on a trailing-twelve-month basis.
• Hong Kong Real Estate stocks also sold off heavily this week and drove much of the 8% short allocation in the International portfolio.

• The International portfolio was remarkably neutral on beta and volatility factors this week but expressed its biases through growth and value factors.
• The portfolio flipped sides on both growth and value factors. The positioning toward growth and away from value can be attributed to the long allocation to Semiconductor stocks and the short allocation to Real Estate stocks which were both concentrated in Hong Kong.
• Popular short stocks outperformed, as noted by the positive exposure to the Short Interest factor this week, which likely created challenges for international long/short managers.

• The International Extreme Movers portfolio shifted its focus away from Emerging Markets. Instead, it saw an increased allocation to Developed Markets, primarily driven by the Asia-Pacific region, resulting in a positive placement in the 55th percentile TTM.
• Within the DM Pacific allocation, Japan emerged as the sole positive contributor, with a weight of 11% in the portfolio. Despite marginal negative contributions from other countries in the same geographic group, Japan's significant performance propelled the DM Pacific to the 66th percentile TTM. The DM Americas and DM Europe & Middle East allocations remained relatively neutral, with slight allocations of -1% and 1%, respectively.
• The portfolio saw positive allocations in EM Americas, primarily driven by the consistently dominant performance of Brazil. However, the even larger short allocation to EM Asia resulted in a negative allocation of -8% to Emerging Markets. As a result, the portfolio's placement in Emerging Markets stood at the 38th percentile TTM and the 34th percentile ITD.
• China and Thailand experienced significant negative allocations, at -10% and -8%, respectively. Among these, Thailand stood out with its largest short allocation TTM and one of the largest short allocations ITD, at the 2nd percentile.

Regards,
Reshma

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