over 3 years ago • 3 mins
Analysts have spent years anticipating a widespread investor “rotation” away from high-growth sectors like tech and towards cheap-looking “value” stocks. They’ve been wrong. A lot. But our analysis suggests that value’s time may now have come 📈
Ever since the last financial crisis, returns from “growth” stocks have consistently outperformed value stocks – which have often been in economically sensitive sectors like autos, energy, and banking.
That’s down to three separate but related reasons – and understanding them is key to identifying the current opportunity.
1️⃣ Falling growth expectations: Declining economic growth forecasts combined with greater uncertainty has left investors less willing to back beaten-up companies whose earnings are reliant on high and rising economic expansion.
2️⃣ Falling bond yields: The dwindling returns available from government bonds (thanks to low central bank interest rates) have pushed investors to seek out fast-growing stocks with the potential for higher returns.
3️⃣ Falling inflation: Low inflation punishes value stocks more than growth stocks. One reason’s that they’re more exposed to the effects of potential deflation. A carmaker, for instance, might be forced to cut prices to encourage customers to buy – but Facebook’s unlikely to have to charge advertisers any less to reach you.
The above-described tide against value stocks might now be turning – and by watching out for the following three indicators, you could be poised to profit from a big upward swing.
1️⃣ Rising economic growth: Value outperforms growth when economic growth is high or accelerating. Emergence from recession should see growth begin to pick up, which might encourage investors to sell bonds and push up their yields. This historically coincides with value stocks rising.
2️⃣ Greater inflation and higher rates: If the Democratic Party wins big in Tuesday’s US election, analysts envisage government spending topping $2 trillion over the next two years. That’d likely push inflation up, with an earlier-than-expected subsequent increase in interest rates making value more attractive (financial stocks, for example, would make more money from loans).
3️⃣ Coronavirus vaccine: A vaccine could loosen lockdowns and lead to faster economic growth than predicted. That’d likely tempt investors away from safe havens like government bonds, with “riskier” stocks – including value – set to benefit.
Now, you could argue that if investors thought the data suggested an imminent renaissance for value stocks, they’d already have acted. But the fact that they haven’t could simply be down to sentiment. After all, big banks recently reported much stronger third-quarter earnings than expected – yet their cheap-looking shares have continued to languish.
In my opinion, however, Finimizers should take note of the following factors:
⚡️ Economies are beginning to grow again. China’s economy is back where it was pre-pandemic, while the US just clocked its highest-ever quarterly growth – leaving it only about 11% below where it was.
☑️ Polls suggest Joe Biden will win the US presidency, and that the Democratic Party will win control of the House of Representatives and the Senate.
😷 There’s been progress toward a vaccine. While what’ll ultimately happen is anyone’s guess, two out of three ain’t bad.
The major risk here is getting caught in a “value trap”. An investor buying cheap-looking stocks in the belief there’s a rebound coming could end up stuck with shares they don’t want – and which no one else will want to buy for more than they paid if the recovery doesn’t happen or the stocks don’t respond as expected. Still, it may be a risk worth taking…
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.