February 2024
Factor Performance Analysis

Momentum and Growth Outperform

The factor trend has persisted since December, but a notable shift was observed in Emerging Markets, where investors favored Growth stocks over Value for the first time in months. As shown in Figure 1 below, the US had a significantly larger factor premium in February, partly due to how concentrated the factor trend was in the region last month.

Momentum continues to drive equity markets in each region but Canada, where the surge in Value and Growth was more prominent than that of Momentum. The Momentum subfactors’ performance was market neutral this month as gains in the annual momentum subfactor were offset by underperformance in short-term momentum.

Crude oil has continued its climb since bottoming at $69/barrel on December 7th, reaching $79.44/barrel on February 28th before crossing the $80 threshold on March 1st.

Gold stayed steady between $2,000-2,100/TOz after its increase earlier in Q4’23. After stabilizing at $40,000/BTC following a 40% surge in Q4, Bitcoin returned 48% in February alone, marking a new all-time high at $62,000/BTC and even crossing the $72,000/BTC mark in early March.

• US Equities: Growth, Volatility and Momentum outperformed.
• European Equities : Momentum outperformed; Quality slightly outperformed.
• UK Equities: Size and Momentum outperformed.
• Emerging Market Equities: Growth and Momentum outperformed.
• Canadian Equities: Value, Growth, and Quality outperformed.

Nvidia’s remarkable achievement of nearly quintupling their earnings over the span of 12 months underscores their adeptness at leveraging the AI trend. This success has not only solidified their position as a leader in the information technology space but has also paved the way for investors to seek out similar opportunities within other US tech stocks, such as Palantir and Super Micro Computer.

The trend today bears striking similarities to the dynamics witnessed during the Zero Interest Rate Policy era in 2020. Subfactor performance within each category has been parallel, indicating a strong trend, and the relative factor premium notably surpassed typical levels, standing at over 200bps per category in one month. As of February, we observe Volatility re-emerging with Growth as Momentum continues carrying the region to new all-time highs.

Nvidia beat earnings estimates by over 11% this month, increasing their EPS from $0.88 to $5.17 in a single year (+28%). Some other tech stocks with a high forecasted growth that drove the performance this month, capitalizing off Nvidia’s success with AI growth, are Palantir (+55%), Super Micro Computer (+63%), and Meta (+25%).

The momentum outperformance was notably lower in Europe than in the US. However, relative to the factor premiums typically observed in the region at +/- 50bps, it is a significant performance as the momentum 12-1 subfactor outperformed by nearly 100bps.

Earlier this year, Europe overtook the US in the race to lower inflation to the long-term 2% target, a trend that’s persisted into February as the region observed a 2.6% YoY increase in inflation while the US has failed to decrease YoY inflation below 3%, standing at 3.2% as of February 2024.

Key drivers of the Momentum surge in Europe include Hermes International (+17% in February, +20% in the last three months); German industrials firm Rheinmetall (+30% in February, +52% in the last three months), Belgian healthcare company UCB SA (+21% in February, +55% in the last three months) and Dutch semiconductor company BE Semiconductor Industries (19% in February, +29% in the last three months).

From a Value and Growth perspective, equity performance in the UK wasn’t as clear as it is in the US. Stocks with a high sales-to-price ratio outperformed by 30bps, but this was countered with a -80bps underperformance from stocks with an above-average cash flow yield. Likewise, in Growth, stocks with a high earnings growth and forecasted earnings growth marginally outperformed, but stocks with high sales growth and dividend growth offset this premium.

Some of the British stocks that drove the Momentum outperformance this month include automobile manufacturer Rolls Royce (+23%); Hotel chain InterContinental Hotels Group (+10%); tech company Alphawave Semi (+31%) and logistics company Wincanton PLC (+42%), the latter of which has returned over 115% in the past 3 months.

Emerging Markets equities that outperformed consistently on a monthly basis over the last year, captured by the Momentum 12-1 subfactor, include Indian Overseas Bank (+31% in February, +65% in the last three months); Indian consumer discretionary firm Trent Limited (+10% in February, +40% in the last three months); Taiwanese tech company Mediatek Inc. (+16 in February, +22% in the last three months); Taiwan Semiconductor Manufacturing Company (+8% in February, +18% in the last three months) and Indian utilities company Adani Green Energy (+13% in February, +85% in the last three months)

Momentum was not as strong in Canada this month, as the short-term momentum subfactor happened to be the lowest-performing subfactor at -70bps. This was offset by an 80bps outperformance in the annual momentum subfactor, leaving the factor to be market-neutral for the month.

Canadian stocks with a high return on equity that drove the Quality outperformance include companies like tech company Celestica Inc. (+22% in February, +57% in the last three months); materials company CCL Industries Inc. (+18% in February, +24% in the last three months); energy company Enerplus Corporation (+21% in February); industrials company TFI International (+11% in February, +25%in the last three months) and Canadian Imperial Bank of Commerce (+4% in February, +16% in the last three months).

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