What drove performance in Q3 2017?

Momentum

Momentum’s stellar performance during Q3 was a sign of alignment with global outcomes, as Price Momentum’s strong recovery in Q3 2017 has seen the factor redeem itself somewhat and recoup much of the losses it experienced last year. Interestingly, Price Momentum gains have been driven by the short side with the long basket performing broadly in lines with the market.
Earnings revisions have also started showing strong improvement during the quarter after a tepid start to the year. Still, corporate earnings estimates are being weighed down by domestic economic and policy uncertainty.

Value

Price to Book has started to cool down after a fantastic 2016 and strong first half of 2017. Cyclical upswings and low levels of economic and policy uncertainty are not typically the optimal environment for this factor.

Dividend yield similarly did well in 2016, along with Q2 in 2017. However, this factor has struggled in Q3 with a sluggish SA economy, and investors redirecting their attention away from counters that offer higher margins of safety (from a valuation perspective) toward more cyclical or growth orientated shares.

Quality

The Return on Equity factor has experienced some inconsistency in performance over the prior quarters. After being the best factor in Q1, it fell back into its ‘2016-like’ performance during Q2, which was followed up by a positive performance over the subsequent third quarter. We maintain that the factor still has some overhang from a moderately crowded position in 2015, based on valuation measures. After some further normalisation, the factor’s long-term premium should become more accessible.

Debt to Equity continues to deliver positively year-to-date after an improved 2016, where this factor showed sporadic bursts corresponding to periods of extreme market stress, reminding us of its defensive attributes.