After a difficult start to the year, quality is staging a recovery. Since the equity market bottomed in June, the quality factor has been a top performer (see Chart 1). The turnaround in quality arguably reflects shifting investor concerns.
MSCI World factor index 1-month performance
Source: Refinitive Datastream, chart by BlackRock Investment Institute , Jul 20, 2022
While headline inflation continues to grind higher, hitting new multi-decade highs, investors are increasingly more worried about a potential recession. Buying quality is a typical reaction to an economic downturn. As investors become more cautious, they rotate towards companies best positioned to withstand a slowdown.
This leaves the question of what constitutes a “quality” company? When describing quality, one of the more ambiguous investment styles, investors typically emphasize characteristics such as earnings consistency, profitability and manageable leverage.