Market leadership among global equities is unlikely to flip to value stocks next year, according to several fund managers, despite a worldwide vaccine rollout underway and an expected return to normality in 2021 seeming to support such a rotation.
The lockdowns imposed to tackle the coronavirus pandemic battered most economically sensitive value stocks and caused a rush to quality-growth stocks such as those within technology and healthcare.
While value has underperformed for much of the past decade, it experienced a sharp rally in November as news of several effective coronavirus vaccines sparked a rally in cyclical stocks that would benefit from any move back to normality.
But William Davies, chief investment officer for EMEA at Columbia Threadneedle Investments, is one who believes quality is set to outperform in 2021 regardless of value’s short bounce.
He recalled how, there was a “sugar rush” in markets at the end of the 2009 global financial crisis where economically sensitive stocks performed very well for a few quarters.
“This is being mimicked somewhat today,” he said. “But, following unprecedented levels of stimulus and government intervention, the level of debt is going to be even greater than it was after 2009, so that rush of recovery is unlikely to persist.
“We will thus emerge into a world of low inflation, low growth and low interest rates – a repeat of the 2010s in some way. Such a backdrop is not one where traditional value is likely to outperform over the longer term.”
Davies argued that inflation – which tends to support value stocks – is unlikely to persist because of all the spare capacity within the economy. Even if it does, it will be accompanied by rising interest rates which will quickly dampen growth due to the cost of servicing the high levels of debt.
“We would therefore caution against a rush to value and poorly performing stocks irrespective of the outlook, and would also caution investors about value traps,” he said.
In other words, the environment will favour quality, long-duration assets and durable growth companies, in his view.
Performance of growth versus value stocks year-to-date
Source: FE Analytics
2020 has seen a large diversion between growth and value stocks, but such a divide is not merit enough to warrant a mean reversion in of itself, according to Romain Boscher, global chief investment officer for equities at Fidelity International.
He believes that it is “less a question of value versus growth and more of a generational shift between old and new sectors”.
The pandemic has accelerated many pre-existing structural trends such as digitisation, boosting the valuations of many technology and platform companies, whilst battering most retail sectors.
“Companies with existing infrastructure, such as cloud storage, that could absorb additional demand on their systems are the main beneficiaries,” Boscher explained. “At the other end of the scale are the ‘old world’ bricks-and-mortar companies such as retailers.”
He added: “Sector divergence, extended valuations at market level and the increased risk of sudden rotations mean that 2021 will require a delicate balancing act between risks and opportunities and an ability to move swiftly as conditions change.”
More specifically, he believes that banks and oil companies are unlikely to benefit from any market rotation despite their low valuations.
“Banks face the prospect of low interest rates for an extended period in much of the developed world,” he explained. “While they went into this crisis in better shape than they did the last, the number of non-performing loans could rise if the pandemic continues throughout 2021.
“[Oil] giants such as BP, Shell and Total have cut their dividends and reallocated capital to invest in green energy. Companies that get left behind in the transition to a low-carbon economy look increasingly at risk.”
Stephen Dover, head of equities at Franklin Templeton, also believes investors will be driven towards global equities in a low growth, low interest-rate world due to their attractiveness relative to other asset classes.
“The trends that have driven equity markets higher since the start of the pandemic, such as digital transformation and innovation in the technology, health care and consumer sectors, are set to continue,” he said.
As a result, he is very constructive towards the sectors “benefiting from the profound digital transformation the global pandemic has pushed into overdrive”.
However, Dover also sees promise in other regional markets such as Japan and China that could be “beneficiaries of distinctive trends worth watching” in the coming year.
Despite the slight rotation into more recovery stocks such as financials, retail and leisure seen earlier in the year following the successful vaccine results, Mark Hargraves, global head of Framlington Equities at AXA Investment Managers, believes their appeal will be short lived.
“Whilst these trends may persist in the short term, as many of these parts of the market no longer trade at such obviously distressed valuations, over 2021 we expect investors to refocus on the medium-term earnings outlook,” he said.
“Within that context structural rather than cyclical trends will likely re-assert themselves.”
As such, Hargraves anticipates that 2021 will see investors focus again on longer term changes within the global economy, such as the shift to a more digital economy, new healthcare innovation and the move to a lower carbon world.
“For longer-term investors, exposure to these secular growth trends remains a compelling proposition,” he said.
Charles Plowden, manager of the £2.9bn Monks Investment Trust, expects markets to further polarise as they did in 2020 between companies that are future winners and the rest.
He said: “Any company’s willingness and ability to respond to current pressing environmental and societal pressures is yet another test of its resilience and even its survivability.”
“Where this leaves overall markets and sectors in the short term is anyone’s guess: I prefer to leave such prognostications to others.
“We are living through a time of unprecedented technological advance across multiple industries; this is enabling new competitors to disrupt the established order with better and often cheaper solutions.
“If the incumbents do not respond radically and rapidly, they are destined to decline.”
Despite some concerns over the valuations of many global equities given the mixed state of the economy, US Federal Reserve chairman Jerome Powell also shared his outlook on global stock markets.
He told CNBC news in a Q&A session following the Fed’s decision to keep its benchmark borrowing rate at near zero that “admittedly (price-to-earnings multiples) are high”.
“But that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically from a term perspective,” he explained.
Indeed, Alex Tedder, chief investment officer and head of global equities at Schroders, argued that whilst global equities are not cheap, they are reasonably valued.
“Considering the scale of the pandemic they performed surprisingly strongly in 2020, and we think they will continue to do well in 2021,” he revealed.
He therefore expects the market recovery to broaden out across a wider range of sectors compared to the past 12 months.
“Technology can still do well, but some of the unloved areas may do better still,” he said.
“We don’t see it being as simple as buying the cheap sectors and selling the expensive ones since, to quote the great Sage of Omaha, ‘price is what you pay, value is what you get’.
“Not all cheap oil, commodity or industrial companies offer good value, and neither do all banks or insurance companies.”
He expects substantial dispersion in every sector as the global economy transitions in 2021.
“Global equities are, in aggregate, reasonably valued and in line with their long-term averages on a forward basis,” Tedder said. “The global dividend yield also remains materially above the bond yield, supporting the relative case for equities over Treasuries.”