This week’s record risk-on equity rotation has excited strategists enough to argue that the shift toward global value stocks has legs, even if they are wary of proclaiming that this time is different for the group as a whole.
Euphoria over a potential vaccine breakthrough sent the world’s cheaper stocks surging the most ever relative to their faster-growing peers on Monday, and they followed up with their third-biggest beat on record on Tuesday. The MSCI All-Country World Value Index jumped almost 6% over the two days, while its growth counterpart fell 2% as investors rotated out of defensive technology names and into shares depressed by the economic impact of lockdowns.
“We think the vaccine news has the potential to drive global growth expectations higher alongside lower uncertainty on the recovery,” wrote a team at Goldman Sachs Group Inc. including Alessio Rizzi in a note Tuesday. “As a result, this should support further rotation into value and cyclical sectors.”
There have been only two comparable periods in history in terms of rotations: a market trough in late 1975 and a peak in late 2000, according to Sundial Capital Research Inc. founder Jason Goepfert. Both led to “massive shifts” toward value stocks, he wrote in a note to clients Tuesday.
Some strategists don’t see such a clear shift emerging this time. While Citigroup Inc. quantitative strategist Chris Montagu is positive on value shares, he expects markets to remain volatile given the backdrop of the worsening coronavirus pandemic. A consistent style trend will remain elusive as long as macroeconomic uncertainty remains, he said.
Citi’s strategists think energy stocks will get the most support from the current rotation, on the back of higher inflation expectations and rising oil prices, according to Montagu. They suggested the case for financials is less convincing and recommended investors sell those shares into the rally, he wrote Tuesday.
Don’t ditch growth
Sanford C. Bernstein’s Inigo Fraser-Jenkins also cautions against buying value stocks across the board. While that strategy might work for “short tactical bounces,” it will be harder for the overall group to “find a sustained footing,” he wrote Wednesday.
The quantitative strategist suggested investors focus on “core cyclicals” which will benefit from higher expected inflation next year, but not to give up on growth stocks.
“An abrupt macro positive shock such as we saw this week can lift all value stocks for a time,” Fraser-Jenkins wrote. “However, we think that the outlook for the next year has to be more nuanced.”