Stock rotation may be in its infancy

Investors are confident that value companies will once again lead the market recovery as in recent recessions

Europe's Cheapest Stocks Are Finally Outperforming Growth Stocks

With the pandemic-induced recession slowly receding, the cheapest stocks in Europe They are finally outperforming stocks in fast-growing companies, and a growing number of fund managers say that, after many false starts, this time the turnover may be only just beginning.

“The value has led the market recovery after each of the last 14 global recessions,” said Ian Butler, who invests in international stocks to JP Morgan Asset Management. In the past, when the value has gone as badly as it has recently, “in all cases it has recovered strongly; this sets a solid historical precedent, ”he said.


For much of 2020, with earnings growth hard to come by, investors bought stocks in companies that could increase returns despite the recession – think winners from lockdown like Sweden Sinch AB, an automated message provider telling you that a taxi or package is on the way.

Or the German food kit company Hello Fresh the best two of the year in the Stoxx Europe 600 index until the end of October. Meanwhile, stocks that were cheap relative to earnings or book value lagged behind.

Everything changed in october

That changed in late October, when investors began pricing at the end of the political uncertainty in the US. And then the successful vaccines. The MSCI Europe Value Index it’s up 23% since October 29, while its growth counterpart is up just 8.4%.

If that persists, I would advocate for investors to invest more money in Europe, where the weighting of value stocks is heavier than in other markets. Over the past 20 years, the stock’s outperformance has often coincided with the outperformance in Europe.

“Europe is a value market, while the United States is a growth market, it is just that,” he said. Kasper Elmgreen, from the fund manager of Amundi, based in Paris. “In my opinion, a scenario where value performs well relative to growth benefits Europe.”

A synchronized economic recovery will make growth stocks less attractive, he said. Luca Paolini, chief strategist of Pictet Asset Management. As a result, the manager is “slowly adding some value” to its asset allocation, he said.

The security has underperformed

Since the aftermath of the global financial crisis a decade ago, security has relentlessly underperformed growth, as falling interest rates made fast-growing companies more attractive than stable ones by increasing value. of your future earnings.

Every attempt to recover value has been short-lived, and this one too will fail unless rates rise again, said Paolini de Pictet. “The precondition for a strong and sustainable (value) rally is not just synchronized growth, but also a sustained increase in bond yields, because without that we will still be wondering whether it is real or not,” he said.

To find the last long period of outperformance in value, investors must go back to the turn of the century. Back then, the stock had underperformed growth for at least five years during the Internet boom of the late 1990s, especially in the US.

Two key episodes

But when the tech bubble burst in 2000, it was the beginning of six and a half years of leadership for cheap stocks. More recently, the latest episode was in the wake of the global financial crisis, when stocks outpaced growth for about six months, led by a rally in bank stocks.

The stars are aligned this time for a potential multi-year top performance for value, according to Amundi’s Elmgreen. Value stocks are at “an attractive starting point” in valuation, both in absolute terms and compared to growth, at a time when the economic rebound “will be very significant,” he said.

Skepticism remains

Some fund managers are skeptical that the move will last. They point to multiple failed attempts by value stocks to take the lead in the past, as well as the need to find long-term earnings growth.

There are several headwinds ahead, depending on Kevin Thozet, member of the investment committee of Carmignac Gestionsuch as reliance on government actions and poor earnings visibility until the vaccine is widely available, while headwinds such as financial conditions and bullish sentiment are likely to fade.

“Both are calling into question the sustainability of the recent streak in value stocks,” Thozet said.

The world is slowly emerging from a pandemic that triggered one of the biggest drops in global growth in history, and the economy is expected to rebound next year.

The unprecedented response from governments and central banks should also help boost inflation, which is still stagnant, and which in turn would help price stocks.

Investor preferences

The idea is that with inflation, investors would prefer the more immediate return on value stocks, many of which pay dividends, rather than the promise of hypothetical future growth.

In the short term, the strategists of Citigroup they recommend value because financial markets should price at higher inflation expectations.

However, after that, there are structural headwinds to reflation that don’t bode well for long-term economic actions, they wrote in a report last week, citing risks such as possible collapses in house prices, financial assets or the price of oil.

Investors are confident that value companies will once again lead the market recovery as in recent recessions


Europe's Cheapest Stocks Are Finally Outperforming Growth Stocks

With the pandemic-induced recession slowly receding, the cheapest stocks in Europe They are finally outperforming stocks in fast-growing companies, and a growing number of fund managers say that, after many false starts, this time the turnover may be only just beginning.

“The value has led the market recovery after each of the last 14 global recessions,” said Ian Butler, who invests in international stocks to JP Morgan Asset Management. In the past, when the value has gone as badly as it has recently, “in all cases it has recovered strongly; this sets a solid historical precedent, ”he said.


For much of 2020, with earnings growth hard to come by, investors bought stocks in companies that could increase returns despite the recession – think winners from lockdown like Sweden Sinch AB, an automated message provider telling you that a taxi or package is on the way.

Or the German food kit company Hello Fresh the best two of the year in the Stoxx Europe 600 index until the end of October. Meanwhile, stocks that were cheap relative to earnings or book value lagged behind.

Everything changed in october

That changed in late October, when investors began pricing at the end of the political uncertainty in the US. And then the successful vaccines. The MSCI Europe Value Index it’s up 23% since October 29, while its growth counterpart is up just 8.4%.

If that persists, I would advocate for investors to invest more money in Europe, where the weighting of value stocks is heavier than in other markets. Over the past 20 years, the stock’s outperformance has often coincided with the outperformance in Europe.

“Europe is a value market, while the United States is a growth market, it is just that,” he said. Kasper Elmgreen, from the fund manager of Amundi, based in Paris. “In my opinion, a scenario where value performs well relative to growth benefits Europe.”

A synchronized economic recovery will make growth stocks less attractive, he said. Luca Paolini, chief strategist of Pictet Asset Management. As a result, the manager is “slowly adding some value” to its asset allocation, he said.

The security has underperformed

Since the aftermath of the global financial crisis a decade ago, security has relentlessly underperformed growth, as falling interest rates made fast-growing companies more attractive than stable ones by increasing value. of your future earnings.

Every attempt to recover value has been short-lived, and this one too will fail unless rates rise again, said Paolini de Pictet. “The precondition for a strong and sustainable (value) rally is not just synchronized growth, but also a sustained increase in bond yields, because without that we will still be wondering whether it is real or not,” he said.

To find the last long period of outperformance in value, investors must go back to the turn of the century. Back then, the stock had underperformed growth for at least five years during the Internet boom of the late 1990s, especially in the US.

Two key episodes

But when the tech bubble burst in 2000, it was the beginning of six and a half years of leadership for cheap stocks. More recently, the latest episode was in the wake of the global financial crisis, when stocks outpaced growth for about six months, led by a rally in bank stocks.

The stars are aligned this time for a potential multi-year top performance for value, according to Amundi’s Elmgreen. Value stocks are at “an attractive starting point” in valuation, both in absolute terms and compared to growth, at a time when the economic rebound “will be very significant,” he said.

Skepticism remains

Some fund managers are skeptical that the move will last. They point to multiple failed attempts by value stocks to take the lead in the past, as well as the need to find long-term earnings growth.

There are several headwinds ahead, depending on Kevin Thozet, member of the investment committee of Carmignac Gestionsuch as reliance on government actions and poor earnings visibility until the vaccine is widely available, while headwinds such as financial conditions and bullish sentiment are likely to fade.

“Both are calling into question the sustainability of the recent streak in value stocks,” Thozet said.

The world is slowly emerging from a pandemic that triggered one of the biggest drops in global growth in history, and the economy is expected to rebound next year.

The unprecedented response from governments and central banks should also help boost inflation, which is still stagnant, and which in turn would help price stocks.

Investor preferences

The idea is that with inflation, investors would prefer the more immediate return on value stocks, many of which pay dividends, rather than the promise of hypothetical future growth.

In the short term, the strategists of Citigroup they recommend value because financial markets should price at higher inflation expectations.

However, after that, there are structural headwinds to reflation that don’t bode well for long-term economic actions, they wrote in a report last week, citing risks such as possible collapses in house prices, financial assets or the price of oil.