Podcast QIS #2 English transcription
Podcast QIS #2 English transcription
Ankit:
Thank you for joining our second podcast covering the challenges and opportunities related to the risk premia space.
Today’s focus is Equity factors.
I am your host, Ankit Gheedia, Head of QIS Research at BBVA Global Markets. I am joined today by Xavier.
Xavier, why don’t you introduce yourself?
Xavier:
Thank you Ankit. I am Xavier de La Porte du Theil, and I’m responsible for QIS solutions and QIS equity indices within BBVA Global Markets.
Q1: “So Ankit, given all the uncertainty since the start of the year, how have equity factors performed?”
Ankit:
Similar to, at the start of the last Trump presidency. Trump trades have lost steam recently.
Year to date, the key theme has been the opposite of US exceptionalism, with non-US stocks outperforming.
In Europe, value has performed strongly year-to-date, with notably strong performance from the banking stocks. Also, the momentum factor in Europe has done well, arguably due to a large overlap with value.
One thing is clear, the volatility in factor rotation has been huge during this cycle.
Xavier:
Q2: “Ok, then how should investors navigate such an environment?”
Ankit:
Positioning is key here. For the past two years, the ‘Magnificent 7’ led the global equity rally.
A well-diversified portfolio underperformed as a result.
However, this year diversification is reaping benefits, with global stocks mounting a comeback.
One-month performance is not a trend, but one thing is clear: positioning is still overweight US and underweight everything else.
Futures open interest on SX5E, for example, was at 20-year lows at the start of the year and has only picked up marginally.
We believe we are at the beginning of the rebalancing trade, and we are likely to see a more tactical approach to factor investing this year.
Q3: So Xavier, given your background in portfolio construction, how should investors think about creating an equity factor portfolio?
Xavier:
Well, investment portfolios should always be based on clear investment objectives, risk tolerances and market views. The same applies to equity factor portfolios, which can be divided into two main categories:
The single factor portfolios, which are used to capitalise on a specific market view or to manage a particular risk within an existing portfolio.
And multi-factor portfolios, which aim to generate stable outperformance across cycles.
Ankit:
Q4: It seems to me that tactical allocation could be sought after at the moment, given uncertainty around geopolitics, tariffs and even Fed policy. How can factor investing be useful today?
Xavier:
Factor investing can actually be quite valuable in periods of market uncertainty, as it provides a structured, data-driven approach to navigate macroeconomic and geopolitical risks.
Factor investing also allows investors to implement defensive, cyclical or balanced equity strategies while controlling sector, regional or stock-specific risks.
Q5: What are the challenges you see in factor investing?
Ankit:
The biggest challenge is clearly getting the market calls right.
Moving past that, one key thing that we face today is also significant intra-factor volatility.
In Europe for example, the value factor has led the rally this year.
Within value, banks are up nearly 20% but at the same time utilities and travel sectors are flat. So intra-factor dispersion has been significant.
A sector-neutral approach to factor investing may help avoid some of these issues.
Q6: What are the challenges we face when constructing a factor-based portfolio?
Well, the first challenge is to build a robust valuation framework, with high quality data and metrics that capture the essence of the factors harmoniously across different sectors and regions.
Then, at the portfolio construction level, the challenge is to provide clear factor exposure while controlling unintended bias that can distort the risk-return profile of the portfolio.
Timing can be another challenge, as factors cycle in and out of favour. Incorrect timing can lead to underperformance.
Ankit:
Timing is a clear challenge, yes. We try to address that with our proprietary macro indicators, which help us position for factor rotation based on macro-economic data.
Q8: Can factor portfolios be used to enhance exposure to a specific benchmark?
Xavier:
Yes, many equity factor portfolios are designed to capture factor exposures while remaining correlated to a particular benchmark, like Eurostoxx, S&P500 or sector indices.
The goal here is to enhance returns through factor tilts without deviating significantly from the benchmark´s risk profile.
Q9: What are your views for 2025
Ankit:
The trend is clearly favouring the value factor, particularly in Europe.
We believe that the outperformance of value globally can continue, particularly given the earnings momentum and the valuation gap with the rest of equity markets.
Within value we expect intra-factor rotation to continue, with the European banking sector taking a breather and other sectors catching up.
Size is one factor which hasn’t performed as we expected, but we believe it is one to monitor closely given the robust global growth outlook.
With that, we end our podcast.
Thank you for listening, and please get in touch if you have any questions or would like to discuss these ideas any further.