Quality factor outperforms broader market in March

Oksana Patron

4 April 2023

The quality factor outperformed the broader market in March and is well placed to continue its strong performance despite the growing risk of an economic downturn this year, according to new analysis from VanEck.

“Volatility in March has provided a further boost to quality stocks, as lower yields increase the relative appeal of long-term corporate earnings,” Arian Neiron, chief executive and managing director, VanEck, Asia-Pacific, said.

This means that a slowing economy, with falling inflation, at the end of a rate hike cycle should see the quality factor come to the fore.

“In the past, in this type of macro environment, companies with strong balance sheets, stable earnings and high return on equity, which are all quality characteristics, have outperformed,” Neiron said.

“Quality was the standout factor between the global financial crisis and emergence of COVID-19 during an era of falling inflation and stagnant economic growth. The stage is set for a repeat of this environment in 2023, and we expect the quality factor to outperform.”

According to the analysis, the Fed is caught between a rock and a hard place and the US central bank is trying to sidestep more repercussions from the disorder within the banking system while at the same time attempting to push down inflation.

“Our view is that earnings downgrades are likely to come through as developed economies navigate further recession risk as a result of the banking crisis.

“In this type of environment investors need to position their portfolio’s defensively and turn to quality names to ride out the storm. Companies with quality characteristics tend to have a track record of beating average ROI capital compared to peers, a high and stable profit margin and high interest rate cover.

“We believe the ‘quality’ factor will be dominant and over the long term and persistent across the cycle, our investment thesis has long supported the view that quality outperforms over the longer term,” Neiron concluded.