The recent indiscriminate value rally will only last for the first six months of 2022, according to Carmignac founder Edouard Carmignac, who said a faltering recovery will allow quality tech names to make up lost ground in the latter part of the year.
However, he said certain cyclical sectors such as energy will continue to rally.
Value stocks have escaped much of the recent market correction. With less than a month of 2022 gone, the MSCI World Value index is already about 10 percentage points ahead of its growth counterpart.
Performance of indices in 2022
Source: FE Analytics
This has partly been attributed to the spike in inflation – growth companies derive more of their value from earnings they expect to receive in the future, and the higher the level of inflation, the less these are worth.
Frederic Leroux, head of the cross-asset team at Carmignac, said this trend will not dissipate any time soon, predicting that the US would experience a self-sustaining inflation cycle for the first time in 40 years.
“You see the start of a possible feedback loop between wages and prices,” he said. “Inflation will probably be more relevant than what the consensus is today – the inflation of the last 12 months is only part of the story.”
He said that more important was the combination of structural forces that could lead to long-term inflation. First was the move to renewable energy, with the lack of investment in oil & gas causing a spike in the price of these commodities as the global economy has re-opened.
Next was the move from monetary to fiscal support. Leroux said this was important as it pumped money directly into the system, and could be targeted more accurately, for example at poorer people who would be more likely to spend it straight away.
Last up was the tightening labour market – 6 million people have left the US workforce since the onset of the coronavirus crisis, and fewer than 2 million have returned. Leroux did not expect the latter figure to increase much further, with the move to working from home changing the shape of the employment market.
“A lot of couples earning two wages have moved somewhere that is much less expensive so only one of them needs to work,” he explained.
“And you see people close to retirement who have created so much wealth over the past three years they are retiring now.
“This creates a rare situation for the worker, as they are in a position of power in wage negotiations. It's a real tidal wave, so yes, inflation can stay higher for longer in the US.”
Source: Carmignac
Yet while inflation is regarded as a tailwind for value investing, it generally needs economic growth as well. And this is where Carmignac said the strategy could struggle for support.
Global economic growth is expected to fall from 5.5% in 2021 to 4.2% this year. However, Raphaël Gallardo, chief economist in Carmignac’s cross-asset team, said this was just the aggregate number, which didn’t tell the whole story.
“The real story is that you're going to have a sharp slowdown in the first half of the year. When we look at the leading indicators by the OECD [Organisation for Economic Co-operation and Development], there is a sharp deceleration in growth in the first semester.”
Source: Carmignac
He said three factors would bring about this deceleration: the Omicron wave, which was exacerbating supply chain issues; high commodity prices, particularly energy; and monetary tightening.
And Carmignac said that while the market appeared to have taken monetary tightening into account, it hadn’t priced in this growth slowdown.
“That, in my view, does not support what the market has been very excited about in the past few months, which is value stocks,” he said. “These companies will have difficulties in passing off the rising costs of materials and wages and make it difficult for them to justify the valuations some of them have reached.
“Whereas to the contrary, the well-entrenched, solid tech companies which have suffered greatly over the past few weeks will have the advantage of being able to absorb these cost pressures, while offering everyone good visibility in terms of their earnings growth in the coming years.
“We would tend not to follow the market right now in its search for value, be it industrials and even financials – energy being a different story.”