Morningstar - Q1 2023 - 43

10
8.26
8.21
EXHIBIT 1
Lesson 2: Rising Rates Don't Have a Predictable
Impact on Stocks
The performance divergence between growth
and value stocks in 2022 was staggering.
The Morningstar Global Value Target Market
Exposure Index, a broad gauge of equities with
value characteristics, outperformed its
growth counterpart by more than 20 percentage
points for the year ( EXHIBIT 2).
Rising interest rates are commonly blamed for
growth stocks' travails. Higher rates, the
explanation goes, are worse for growth stocks
because of their longer durations. It sounds
logical. But research from AQR disputes
the link between style performance and interest
rates. Writes AQR's CIO Cliff Asness:
" Growth stocks have much longer-dated cash
flows than value stocks and thus should
be a 'longer duration' asset and move more with
longer-term interest rates, right? ... This is all
taken as an axiomatic given in countless pundit
and press observations. However, it's not
nearly that simple, and mostly it's just not true. " 1
Consider style performance in prior periods
of rising rates. The Federal Reserve hiked rates by
2.25 percentage points from 2015 to 2018, but
growth stocks thrived. It was the FANG market,
led by Facebook (now Meta Platforms META),
Amazon.com AMZN, Netflix NFLX, and Google (now
Alphabet GOOG). Morningstar's global growth
and global value indexes were both up big in those
years. Then there was 1999, a year in which
the Fed raised interest rates three times, but the
dot-com bubble propelled growth stocks into
the stratosphere.
In 2022, dividend-paying stocks shone. That's
notable because a common line of thinking sees
rising rates as bad for dividends. Why?
Higher bond yields supposedly diminish the appeal
of equities for income investors and raise
their debt-servicing costs. Yet, the Morningstar
Global Markets Dividend Yield Focus Index
shrugged off rate hikes to return 0.67% in 2022.
No Free Lunch In 2022, stocks and
bonds fell in lockstep, failing to offer
investors expected diversification.
Morningstar Global Markets Index
Morningstar Global Core Bond Index
$12K
EXHIBIT 2
8
Growth's Tough Year Value stocks
trounced growth stocks in 2022,
but were rising rates the culprit?
Probably not.
6
12/2021
12/2022
Morningstar Global Value TME Index
Morningstar Global Growth TME Index
$12K
Morningstar Global Ma
Morningstar Global Ma
Leaders Index
$12K
10
8.26
8.21
8
6
12/2021
Source: Morningstar Direct. Data as of Dec. 31, 2022.
Why did dividend payers hold up so well?
Several factors were at play. It's certainly true that
rising rates lifted yields on cash and bonds. But,
as discussed above, fixed income was a
disaster from a total-return perspective. Sector
dynamics also boosted the dividend-paying
section of the market. Energy, a dividend-rich area,
was by far the best-performing equity sector.
Meanwhile, dividend payers in defensive
sectors like healthcare, consumer staples, and
utilities weathered the storm far better than
the dividend-light technology sector, which led
the market down in 2022.
Morningstar Global Value TME Index
Morningstar Global Growth TME Index
$12K
10
9.27
8
7.22
6
12/2021
12/2022
Historically and globally, the link between dividend
payers and rates is weak. To cite one example,
from 2004 to 2006, rates rose but dividend stocks
dramatically outperformed the market. In a recent
study, we examined the performance of high-yield
equities in the U.S., U.K., Germany, Japan, and
Australia and found no clear relationship between
rates and dividends.2
1 Asness, C. 2022. " Is Value Just an Interest Rate Bet? " AQR. Aug. 11.
2 Lefkovitz, D. & Gattani, S. 2022. " Why Haven't Rising Rates Sunk Dividend-Paying Stocks? " Morningstar white paper, October.
morningstar.com/products/magazine
8
Lesson 3: Sustainable Investments Aren't
Immune to Market Cycles
8
Consider the struggles of the Morningstar Global
Markets Sustainability Leaders Index in 2022
( EXHIBIT 3). The index excludes several classes of
stock and selects companies with the lowest
environmental, social, and governance risks,
according to Morningstar Sustainalytics. It had
outperformed its parent index by 28 percentage
points in cumulative terms for the five years
ended in 2021. It wasn't alone. For the five years
through 2021, 80% of Morningstar sustainable
6
12/2021
$12K
12/2022
8
6
12/2021
Source: Morningstar Direct. Data as of Dec. 31, 2022.
8
7.22
6
12/2022
12/2021
10
10
9.27
The lesson for investors? Don't try to time
the macro environment. Growth stocks, especially
technology, entered 2022 carrying sky-high
valuations after years of market leadership.
Energy and other dividend-rich areas on the value
side of the market were priced more reasonably.
For dividend investors, fundamental factors
like quality and financial health are far more
important than interest rates.
$12K
10
Morningstar Exponen
Morningstar Global D
Morningstar Global Fo
Morningstar Global M
Morningstar Global Ma
Morningstar PitchBook
10
43

https://www.morningstar.com/stocks/xnas/meta/quote https://www.morningstar.com/stocks/xnas/amzn/quote https://www.morningstar.com/stocks/xnas/nflx/quote https://www.morningstar.com/stocks/xnas/goog/quote https://indexes.morningstar.com/insights/analysis/bltdac5fe89db97bb26/why-havent-rising-rates-sunk-dividend-paying-stocks http://www.morningstar.com/products/magazine

Morningstar - Q1 2023

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