With the growth firms up much of the time over the past decade, there was much speculation about when, if at all, the markets would see a sustained rotation of value.
The vaccine breakthroughs late last year sparked such a resurgence in traditional value sectors and our Liontrust multi-asset portfolios have benefited from this and added to our cyclical bias as managers seek to capitalize on these unpopular areas.
Aside from concerns that the rotation may already be wearing off, this rally has only added to the fact that these style terms are broad terms and there are far more nuances in the markets than a simple growth / value divide. The idea of dragging one style over another needs to be filtered through regional and sectoral viewpoints to identify opportunities, and reliance on historical trends can often lead investors on the wrong track.
At the beginning of 2021, when the rotation started in earnest, underweighting the US and overweighting Europe, Japan and the UK (as the main growth and three value markets) seemed on the surface the best way to participate in the rally – but this has only partially proven true.
Looking at US stocks, the performance was in the second half of the 20th. This changed significantly in the wake of the global financial crisis, as the technological dominance of the US – and the emergence of the giants FAANG (Facebook, Amazon, Apple, Netflix and Google) – Are interlinked with the general growth trend of the markets. As a result, growth has dominated overall “stock” returns for most of the last decade.
As expected, this led to a protracted phase of the “slump in values”. It has always been a recognized investment wisdom that value outperforms growth over the long term: in the nearly 100 years from 1926 to the end of 2020, the numbers were accordingly 1,344,600% versus 626,600% according to data from Bank of America. But as the years went by, and the discrepancy in favor of growth widened and tech dominance continued to grow, investors began to question the attractiveness of value as an investment style.
However, positive vaccine news turned this trend on its head and sparked a broad equity rally, and Value performed strongly in the first half of 2021. Value generates twice as much Growth returns, compared to a 34% gap in favor of the former in 2020. Against this background, the obvious assumption would be that the nominally growth-oriented US has had a hot time, but in reality the market was simply back in tune with the rest of the world , with its value stocks taking the reins in large, mid, and small caps.
This may reinforce the fact that the division of value and growth is more pronounced in US fund management than in other regions. So when conditions favor one style over the other, it tends to affect the entire market.
Recently, concerns about Covid variants and economies not meeting growth expectations have slowed value rotation as investors increase their exposure to cyclical, value and small-cap stocks and the return to the familiar embrace of technology, growth and large-cap stocks.
Often viewed as a more valuable game, it may come as no surprise that European stocks were among the best-performing markets this year. On closer inspection, however, small and medium-sized companies of all investment styles were the more relevant driver. The quality and growth that held up during the value rally have taken the lead this year to date. Europe is actually more of a cyclical market as an exporter to the rest of the world, so it is well positioned to benefit from improving economic conditions as the world continues to open up: within the “Value” cohort, more cyclical sectors have traditionally more defensive ones Outperformed sectors such as tobacco and utilities.
On the whole, the picture is similar in Great Britain, which was significantly better positioned in 2021 than in the previous year, as the short-term uncertainty about the lifting of the Brexit vote and the high proportion of value and cyclical companies enjoy a strong tailwind if the Covid situation improved. Again, the best performers were below-cap stocks, driven by the rebound in investor risk and merger and acquisition activity, where growth has again taken the lead recently.
Similar nuances are required to get a complete picture in the “valuable” Japan and “growth” Asia as well as in the emerging markets. Japan is experiencing a trend similar to the US, with value and high-dividend companies beating year to date and very little dispersion across market capitalization. This, in turn, could be due to the very clear style lines of Japanese fund managers.
Emerging markets and Asia have a profile similar to Europe, with small caps outperforming so far this year. Growth as a style has lagged, compounded more recently by crackdown on tech companies in China and uncertainty about this heightened political risk. Looking ahead, it becomes increasingly important to consider what types of companies are favorably rated by the government; those who widen the wealth gap seem fundamentally at odds with a regime that tries, at least nominally, to create an equitable society.
As expected, these underlying factors tend to fluctuate up and down, but we believe that focusing too much on style labels can prove to be a reducing factor in long-term investments as we step back from day-to-day operations and potentially run the risk of missing out on opportunities. Our multi-assert portfolios and funds are based on long-term Strategic Asset Allocation (SAA) and are therefore not subject to extensive shifts in or out of asset classes. But fear and greed continue to seduce investors into trying to time markets, and perhaps the recent value rotation could have moved people to dump US stocks if performance has actually stayed constant.
Looking ahead, we are always cautious about extrapolating short-term data into long-term results, warning of overreaction, both positive and negative. As mentioned earlier, there is evidence that value rotation may decrease if the momentum of Purchasing Managers’ Indices (PMIs) changes, but we also point to supportive longer-term factors, including President Biden’s infrastructure program and the Green Industrial Revolution in Great Britain .
After such a strong rebound, some setback to the reflation trade was inevitable, and further appreciation could come in the fall as many growth sectors remain prohibitively expensive. Value has underperformed for many years, and we believe the recent rotation could ultimately turn out to be the first part of a multi-year cut.
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Main risksPast performance is not a guide to future performance. Remember that the value of any investment and the income from it can go down as well as up and is not guaranteed. As a result, you may not get back the amount originally invested and you may risk a total loss of capital. The majority of the Liontrust Sustainable Future Funds hold holdings that are denominated in currencies other than sterling and that are subject to fluctuations in exchange rates. Some of these funds invest in emerging markets which may be more risky due to less well regulated markets and political and economic instability. As a result, the value of an investment can go up or down in accordance with foreign exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest in a narrow range geographically and have a concentrated portfolio of securities. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed income securities – fluctuations in interest rates can affect the value of these financial instruments. If long-term interest rates rise, the value of your stocks will likely fall. When you need quick access to your money, selling holdings in corporate bond funds can be difficult in difficult market conditions. This is because there is little trading activity in the markets for many of the bonds held by these funds. The above five funds can also invest in derivatives. Derivatives are used to protect against currency, credit and interest rate fluctuations or for investment purposes. There is a risk that derivative positions could result in losses or that counterparties may fail to enter into transactions.
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Tuesday, September 21, 2021, 9:38 am
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Liontrust Asset Management plc published this content on September 21, 2021 and is solely responsible for the information contained therein. Distributed by public, unedited and unchanged, on September 21, 2021 09:51:02 UTC.