In the years since the financial crisis, the value factor has seen mixed results—until 2016, that is. Value did particularly well last year, and all signs point to continued success this year.

Rotation toward value factor

In a research note dated Jan. 5, Morgan Stanley equity strategist Charles Clavel and team noted the strong rebound in the value factor throughout much of 2016, naming it “Factor of the Year” for 2016. They said value did well across geographic regions, which they believe could mean that it will continue to do well this year, especially in Japan.

They reported that December capped a year of strength for value investing, which confirms a global rotation toward the value factor which began early last year. Further, value became even stronger after Brexit. Clavel and team added that outside of Japan, value’s outperformance of growth was very high compared to historical standards.

Value factor to keep outperforming

They described value investing’s outperformance against other factors and across regions as “extremely high” in December, marking the third consecutive month of extreme outperformance.

Based on this, the Morgan Stanley team expects value to continue outperforming growth factors at least through this month.

However, their timing model appears more neutral on value for all regions except for Japan. In order to determine whether the value rally will continue, they will be watching long-term rates.

value factor

They caution that one concern for value investing is the recent sharp increase in rates.

Other factors showing mixed performance

On the flip side, price momentum and revisions did poorly in most regions in December, but they aren’t as vulnerable to “sharp drawdowns.”

“The net beta of price momentum has become closer to historical medians, and recent momentum volatility has declined significantly,” the Morgan Stanley team wrote.

They said there are still “substantial active bets” in momentum, especially in North America and Europe. They advisor investors worried about a future drawdown in momentum to trim their positions in “high/ low momentum stocks with the highest contributions to momentum volatility.”

The Morgan Stanley team added that although the value factor outperformed across global regions, other factors have had mixed performances across the regions. For example, junk/ high beta did well in Europe and Japan but poorly in the Asia Pacific ex-Japan region, EM and North America. Small caps beat mega caps in Japan, the Asia Pacific ex-Japan region, and EM, but they did poorly in North America and Europe.