The Changing Face of Momentum

| Equities | Perspectives

Executive Summary

Over the last 18 months markets have exhibited some of the starkest moves in recent history and the equity factor space has been no exception. The ‘COVID Winners’ vs ‘COVID Losers’ theme, reflecting the disruption of the pandemic, had come to dominate the returns of two factors in particular: Momentum and Value.

As market participants switch their focus towards reopening, the Momentum factor, which bets that the previous (losers) winners will continue to (under) perform, has been rapidly changing. By examining the changing face of Momentum, we uncover a shift in focus away from the COVID Winners bet that characterised 2020. The result is an equity factor suite that is better diversified, capturing a greater set of effective bets.

Momentum : oil tanker or speed boat?

Prior to the announcement of a vaccine breakthrough in early November, the global developed long-short Momentum basket1 was characterized by being long those stocks which had performed well in the pandemic, COVID Winners, and short those which had performed poorly, COVID Losers.

Prior to November the global developed long-short Momentum basket1 was characterized by COVID Winners and COVID Losers.

This is well highlighted by the net sector exposures of the long-short basket at the start of October with heavy long exposure to Technology, Health Care and short exposure to Financials, Energy and Real Estate, illustrated below in Figure 1.

Figure 1: Global Long-Short Momentum Basket Net Sector Exposure as of 1Oct 20

Figure 1: Global Long-Short Momentum Basket Net Sector Exposure as of 1Oct 20
Source: Unigestion. As at 1 October 2020

As the ‘Vaccine Rally’ of late 2020 and early 2021 reversed the fortunes of many COVID Winners and Losers, it begs the question, how quickly did Momentum pivot away from this thematic bet? To answer this, we have taken all the stocks in the long Momentum basket in October to see which Momentum bucket they end up in at the start of subsequent quarters (Figure 2), and we have done the same exercise for the short leg (Figure 3).

The January Momentum basket retained a large proportion of the COVID bet, with around 60% of the longs and shorts remaining in their top and bottom deciles respectively.

Figure 2: Momentum Longs (Decile 1 = best)

Figure 2: Momentum Longs (Decile 1 = best)
Source: Unigestion. As at 1July 2021

Figure 3: Momentum Shorts (Decile 10 = worst)

Figure 3: Momentum Shorts (Decile 10 = worst)

The January Momentum basket still retained a large proportion of the COVID bet with around 60% of the long and shorts remaining in their top and bottom deciles respectively. In the April rebalance, we lost the COVID market crash from the lookback period, which proved a catalyst for a strong rotation. Indeed, one can argue that by April, Momentum had lost much of its COVID bet. By the start of July, the position is even more extreme, with a large proportion of the stocks which were in the long basket in October, now in the short basket; a partial inversion of the portfolio held only six months earlier.

By April 2021, Momentum had lost much of its COVID bet and by the beginning of July the position is even more extreme, with a large proportion of the stocks which were in the long basket in October, now in the short basket.

Delving further, we can see that these ‘long movers’ intuitively fit a COVID bet rotation. Health Care stocks which might have benefitted from the pandemic have reverted sharply. Similarly, some software companies which initially benefited from the remote working scenario now constitute some of the poorest recent performers. And while materials stocks may be considered more cyclical, we see precious metals miners transitioning from long to short (Figure 4).

Figure 4: Momentum ‘Long-to-Short’ movers by Industry Group

Figure 4: Momentum 'Long-to-Short' movers by Industry Group
Source: Unigestion. As at 1 July 2021

It is clear then that Momentum has changed character, but how do we convince ourselves that this reflects a shift in exposure to the COVID bet?

June 2021: last gasp of the old dynamic?

Stock performance in June 2021 was characterised by a reversion to some of the themes prevalent in the ‘pre-vaccine’ COVID months as investor confidence was shaken by the rise of the Delta variant. The Value factor, whose performance has also been closely tied with the COVID outlook, had a strong reversal following a relentless march upwards at the start of the year. This gives us the opportunity to ask how the Momentum rebalances have impacted exposure to the COVID bet.

Stock performance in June was characterised by a reversion to some of the themes prevalent in the ‘pre-vaccine’ COVID months.

We tracked the performance of the long-short Momentum baskets constructed at the beginning of October, January, April and June through June. This highlights how the changing shape of Momentum impacted performance during a month characterised by the market dynamic seen in 2020.

Figure 5: Performance of each historic Momentum basket if it were held from end May 2020 to end June 2021

Figure 5: Performance of each historic Momentum basket if it were held from end May 2020 to end June 2021

Source: Unigestion. As at 1 July 2021

It is clear to see the hierarchy of performance: the older the basket, the higher the impact of the COVID bet. The baskets from October and January are highly sensitive to the theme – while the neutral performance of the June portfolio emphasises how Momentum has become largely uncorrelated to this dynamic.

Sectors which exhibited muted net exposure in October now command significant weight in the portfolio.

The sector positioning through time gives further intuitive weight to this theory, illustrated below in Figure 6. Not only has there been a complete reversal of some of the net exposures in October (notably Tech, Health Care and Financials) but also sectors which exhibited muted net exposure now command significant weight (Consumer Discretionary, Consumer Staples and Industrials).

Figure 6: Global long-short Momentum net sector exposure at each rebalancing

Figure 6: Global long-short Momentum net sector exposure at each rebalancing

Source: Unigestion. As at 1 July 2021

Momentum and Value: not friends, but not enemies?

The Momentum factor has historically exhibited on average a persistent negative correlation with Value. Indeed, during the COVID crisis, Momentum’s outperformance was mirrored by the stark underperformance of Value.

The Momentum and Value factors have historically exhibited a strong negative relationship, however over the last six months the two have become weakly positively related.

We can observe the expected forward looking relationship between Value and Momentum by looking at the correlation between their scores (Figure 7). This metric has moved from some of its lowest levels since 1998, to some of its highest, in the space of the last 6 months. Momentum and Value are then weakly positively related – having been strongly negative.

Figure 7: Value-Momentum Factor Score Correlation

Figure 7: Value-Momentum Factor Score Correlation

Source: Unigestion. As at 1 July 2021

As sentiment changed following the ‘Vaccine Rally’, Value has enjoyed a strong run of performance. A natural conclusion might be that, as Momentum and Value have coalesced, Value’s relationship with the COVID bet has also weakened.

Value has enjoyed a strong run of performance following the vaccine rally.

To consider this, we repeat the same analysis conducted for Momentum by looking at the transition of the L/S Value portfolio stocks through subsequent rebalances. We see a much slower decay away from the October basket for Value, indicating that Value is likely to continue its relationship with the broader thematic.

Figure 8: Value Longs (Decile 1 = best)

Figure 8: Value Longs (Decile 1 = best)
Source: Unigestion. As at 1 July 2021

Figure 9: Value Shorts (Decile 10 = worst)

Figure 9: Value Shorts (Decile 10 = worst)

This observation is confirmed by the remarkably similar performance of each of the historic Value baskets in June 2021.

Figure10: Performance of Historic L/S Value Baskets in June 2021

Figure10: Performance of Historic L/S Value Baskets in June 2021

Source: Unigestion. As at 1 July 2021

With respect to the COVID bet, we conclude that while Momentum has changed – Value has not.

Where Momentum gains would have once offset Value losses, the relationship between the two is likely to be more blurry going forward, producing a more diversified set of returns.

So where Momentum gains would have once offset Value losses (and vice versa), the relationship between the two is likely to be much more blurry going forward. At the level of the factor portfolio, then, rather than having two broadly cancelling positions, we should enjoy a more diversified set of returns.

Conclusion: momentum rebalancing in turbulent markets

The Momentum factor, by nature of its construction, exhibits the largest turnover of all the traditional equity factors. When markets move hard and fast, what was once ‘Momentum’ might not be so currently.

The COVID crisis has been a perfect example of this playing out and highlights the importance of looking through the Momentum basket to understand its sensitives. Historical correlations can be misleading when the factor baskets are changing this fast.

We see clear evidence that not only has Momentum changed character dramatically, but that this can be seen as a neutralisation of the COVID bet that dominated 2020. While its relationship with Value has also shifted, we do not see evidence that Value has lost its sensitivity to the COVID bet. The result is a more diversified set of factor bets.

1We construct a Momentum factor which ranks stocks on their ‘12 minus 1 month’ performance, normalized by stock volatility and go 100% long the top decile, 100% short the bottom decile. Stocks are weighted by their factor score within each leg. The score is region neutralized to avoid large regional exposures, but sector biases persist.


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Document issued July 2021.