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2020: A Year of BifurKation

Nearly everywhere we look in 2020, we see bifurcation, across macroeconomic indicators, countries, sectors and investment strategies. To help explain what’s driving this, we recently sat down with three of BlackRock’s Systematic investors, Jeff Shen and Raffaele Savi, co-CIO’s of Systematic Active Equities, and Tom Parker, CIO of Systematic Fixed Income, to take a deeper look at the bifurcation across markets and to explore  some opportunities that systematic investors have been capitalizing on.

Can you explain the bifurcation in performance this year? How do you think investors will remember 2020?

Raffaele Savi: This year has been a year of divergence between the physical and the virtual. If you operated in the virtual world, you had a tailwind from COVID-19. If you operated in the physical world, this year has been a massive headwind. How that’s been translated in equity markets has been quite unique. If you look at the divergence in performance between the winners and the losers, the haves and the have nots, it’s one of the biggest on record. You can go back 100 years, and it’s hard to find this type of dispersion in country and sector performance.

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2020 will be a remembered as the year in which alternative data became table stakes for investors.

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Raffaele Savi Global Head of BlackRock Systematic

This dispersion informs a lot of the drivers of active performance this year. Looking at momentum versus value, there has been big divergence. The underperformance of value has been a pain point for a lot of investors. What we’ve seen this year is a combination of things. There are investments captured in value today that are structurally disrupted businesses, businesses facing challenges for decades like European banks. There are businesses that are dependent on commodity prices like oil and energy, but there are also companies like airlines or cruise lines that are truly COVID value stories.

Looking across quantitative strategies, there has never been this kind of performance gap in history. I think it truly has depended on a few things: whether your process was dynamic; whether you were ready to adjust to a very different market environment; or whether you stuck to a very static view of what the right allocation was across different ideas in your portfolio. If your process was modern, and you were fully invested in alternative data, or if you dismissed that as a big alpha opportunity was a key differentiator.

2020 will probably be a remembered as the year in which alternative data became table stakes for investors. It’s very hard to navigate this sort of this fast-changing environment without ideas of how consumers are changing their purchasing patterns in real time, how this evolution has played out in different parts of the market, and in different countries. In 2020 we saw virtual outperform physical, dynamic outperform static, and modern outperform traditional – and that’s driven the big separation we’ve seen in terms of performance.

2020 has been an odd year for everyone. What previous market environment has the most in common with the 11 months we’ve just gone through?

Jeff Shen: 2020 has been an extraordinary year; quite different from any in our recent memory. When you go back in history and look at which period is most similar, it’s quite interesting. 2020 is not a global financial crisis. The GFC period in 2008 was quite different compared to what we have gone through this year. There are a few reasons for that, but I think one observation is that the market dynamics are quite different. 

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COVID has pushed the economic cycle to be more like the early part of a recovery.

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Jeff Shen, PhD Co-CIO and Co-Head of Systematic Active Equity

This year is more like the early 1990s. If you do the analysis, you realize the current cycle has been pushed into a little bit of an earlier phase.  We were certainly looking more and more like late cycle, but COVID has pushed the economic cycle to be more like the early part of a recovery. 

Two characteristics are driving this trend. One is lower interest rates, especially in the U.S. and in other developed markets. They are pushing us closer to an early cycle comparison.  Second is value underperformance, which has been significant, and also shares more similarities to an early part of an economic cycle.

How has this recession been different from previous recessions?

Tom Parker: Housing has always been a leading indicator of previous recessions. You can see that in the falling yellow line in the chart below, that occurs before every recession shown. Housing leads you in, and you know you’re in a recovery when housing starts booming. And that’s been a consistent pattern over time.

US House Sales and US Unemployment Rate

US House Sales and US Unemployment Rate

Source: Bloomberg, August 2020.

The 2008 recession is notable for the extremely slow recovery in housing relative to previous recessions. The lack of strength in the recovery was primarily due to the fact that housing was ground zero in the boom and the bust. In that case, we had the slowest housing recovery in history.

It’s interesting to note that lower housing and lower government spending explained most of the difference of the post-2008 recovery relative to the long-term average. It’s also interesting to note, just as this low housing and low government spending explained the recovery in the early 2010s, there was a big jump in housing late in the cycle that helped the economy over the last four years. This also increased government spending, which might be contrary to people’s preconceptions of what determined that recovery. 

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This is different from every other kind of recession that we’ve seen previously.

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Tom Parker, CFA CIO of Systematic Fixed Income

The current recession, seen at the far-right side of the chart above, shows rising home sales into the 2020 recession. There was no slowdown.  In fact, we had an acceleration of home sales. We got a small dip in the March period, and then we’ve had a boom. This is different from every other kind of recession that we’ve seen previously. A lot of the contributors we’ve seen in this recession have been different than previous recessions, and that difference is due to COVID-19. It has produced sudden-stop-and-restart economics. These trends have resulted in some of the dramatic bifurcations we’ve seen in markets this year.

Raffaele Savi
Global Head of BlackRock Systematic and Co-CIO and Co-Head of Systematic Active Equity
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Jeff Shen, PhD
Co-CIO and Co-Head of Systematic Active Equity
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Tom Parker, CFA
CIO of Systematic Fixed Income
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