Outperformance in low growth


We have had QE 1, 2 and 3, Abenomics, taper tantrums, debt crises and now European QE. During all these, investors have been concerned about the economic influence and the impact on investments...

We have had QE 1, 2 and 3, Abenomics, taper tantrums, debt crises and now European QE. During all these, investors have been concerned about the economic influence and the impact on investments. While economic uncertainty continues, the process for choosing quality investments has not.

Investors, more than ever, are looking for investments that outperform throughout the economic cycle. By analysing more than 40 years’ data, it can be shown that companies which outperform over the long term have identifiable characteristics.

A quick refresh 

There are four basic stages of the economic cycle. These are distinguished by economic growth and inflation.

  1. A slow-down is a period of slow growth and falling inflation (or deflation).
  2. A recovery is typified by rising growth and falling inflation.
  3. A heating-up economy is one which is characterised by rising growth and rising inflation.
  4. Stagflation is a period of slow growth and high inflation.

Different types of companies tend to perform better than others during the different stages of the economic cycle.

Investment professionals try to identify companies that will outperform over the long term. Some classify Quality companies as those that have been consistently profitable and have increased their earnings throughout all stages of the economic cycle. MSCI defines Quality companies as those that have demonstrated historically high return on equity, stable annual earnings growth, and low financial leverage. The MSCI World ex Australia Quality Index only includes the highest scoring 300 companies based on these three factors.

We have been able to illustrate that the MSCI World ex Australia Quality Index outperforms the standard benchmark, MSCI World ex Australia Index, over the long term (here and here).

Economic cycle: Where the global economy is now 

Many commentators believe that the global economy is entering the slow-down stage of the economic cycle (slow growth and falling inflation). This is evidenced by:

  • Sustained low interest rates and the continued need for central bank intervention. The most recent European QE and long term bond yields are signs of low growth;
  • Slowing demand and falling commodity prices;
  • Falling demand and structural change in China further dampening growth prospects;
  • Falling consumer price levels in many countries; and
  • The steady increase in the proportion of countries with deflation.

Performance of MSCI Quality 

MSCI analysed1more than 40 years’ data to provide insight into the best periods of outperformance of its Quality factor.

MSCI, by comparing the performance of its World Quality Index, its World Index and its World Sector Indices in economic periods characterised by rising and falling growth and inflation, MSCI demonstrates that its Quality factor consistently outperforms in three out of the four stages of the economic cycle. A summary of the analysis is below.

MSCI Quality traditionally has its strongest relative performance during economic downturns.

Table 1 - Summary of bivariate analysis of MSCI Quality and sector indices in economic regimes classified by rising/falling OECD total CLI and All items CPI – World Index (Dec 1975 – Dec 2013) 

Stage of economic cycle Economic conditions Quality factor performance Sector comments
Slow down  Slowing growth / falling inflation Strong outperformance Health care and consumer staples outperform, materials, energy and industrials underperform.
Recovery  Rising growth / falling inflation Moderate Underperformance Energy and materials outperforming, health care and consumer sectors underperforming
Heating-up  Rising growth / rising inflation Moderate outperformance IT sector outperforming, financials and telecommunications underperforming
Stagflation  Slowing growth / rising inflation Strong outperformance Health care, energy and consumer staples outperform, consumer discretionary and materials underperform.

Source: Market Vectors, Gupta et al, 2014

Quality may hedge the risk of decreasing growth 

MSCI’s Quality factor has historically been an effective hedge in periods of decreasing growth, generally outperforming more cyclical investments. Quality can be considered defensive. It has tended to only underperform, on a relative basis, during stronger economic times.

See below, the main periods of relative outperformance of the 'Quality' factor:

Financial Markets Crisis Year Outperformance1 
Dotcom crash  2001 +4.82%
GFC  2008 +9.08%
Eurozone Crisis  2011 +10.02%

Source: MSCI. Outperformance is the respective calendar year return of the MSCI World ex Australia Quality Index relative to the MSCI World ex Australia Index. You cannot directly invest in an index. Index performance returns differ from fund returns. Past performance is not a reliable indicator of current or future performance of an index or fund which may be lower or higher.

Historically, MSCI research shows Quality has outperformed in periods that had the characteristics of current global markets.

In October last year, Market Vectors ETFs launched the Market Vectors MSCI World ex Australia Quality ETF (ASX code: QUAL). QUAL is the only ETF that tracks the MSCI World ex Australia Quality Index. For more information on QUAL please speak to one of our ETF specialists on 02 8038 3300 or email us at info@marketvectors.com.au.

IMPORTANT NOTICE: This information is issued by Market Vectors Investments Limited ABN 22 146 596 116 AFSL 416755 as responsible entity ('MVI') of the Market Vectors MSCI World ex Australia Quality ETF ('QUAL'). MVI is a wholly owned subsidiary of Van Eck Associates Corporation based in New York ('Van Eck Global').

This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation nor needs ('circumstances'). Before making an investment decision in relation to QUAL, you should read the product disclosure statement ('PDS') and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.marketvectors.com.au or by calling 1300 MV ETFs (1300 68 3837).

QUAL is subject to investment risk, including possible delays in repayment and loss of capital invested. Past performance is not a reliable indicator of current or future performance. No member of the Van Eck Global group of companies guarantees the repayment of capital, the performance, or any particular rate of return from the Fund.

QUAL is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to QUAL or the Reference Index. The PDS contains a more detailed description of the limited relationship MSCI has with MVI and QUAL.

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1Gupta, Abhishek, Altaf Kassam, Raghu Surtanarayanan, Katalin Varga. 2014. “Index Performance in Changing Economic Environments.” MSCI Research Insight

Published: 09 August 2018