Will the rotation into value continue?

Wed 31 Mar 2021

The year of the vaccine

Successful vaccines, the passing of the US election and an increasing belief in strong global growth in 2021 have all come together to spur global equity markets and risk assets higher over the past few months. After a decade of fast-growing technology companies dominating the markets, a strong economic recovery could cause a major shift. Value stocks – or cheaper shares such as banks and energy firms – have handsomely outperformed fast-growing stocks such as the big tech names in 2021 so far. Stocks such as Bank of America and Exxon are beating the likes of Tesla and Amazon.

And then there are rising bond yields and inflation…

US Federal Reserve Chairman Jerome Powell suggested that the central bank would let inflation run hotter if it helped achieve full and inclusive employment. Recent concerns about inflation have driven bond yields higher. This month yields on the benchmark US 10-year treasury climbed to 1.75%, the highest since January 2020, while the 30-year treasury yield jumped to 2.5% for the first time since August 2019. Higher inflation, after all, often comes with an uptick in economic growth, which should benefit value stocks that are economically sensitive – like those of banks and energy companies – more than those that aren’t, like tech. That’s reflected in share price moves this year too: US energy and banks stocks have outperformed tech stocks by 33% and 16% respectively.

Can the rotation sustain itself beyond 2021?

While it remains to be seen how long value leadership will last, many of the drivers that led investors to flock to growth stocks have reversed and now favour value stocks. The jury is still out on whether we will see a generalised correction in stock markets, and there would have to be the prospect of interest rate rises or other monetary tightening before that occurs. We believe that even if a rotation takes place there will be winners and losers among both growth and value shares – they will not all go up, and all go down. For instance, over the past year, people have made themself even more familiar with digitalisation by shopping online and working from home. Therefore, technology shares and other growth companies could continue to serve investors well even in a post-Covid world.