Value: a more sustained bounce back?

9 min read 8 Dec 20

Summary: In this month’s video and blog Investment Specialist, Kirsty Clark comments on the recent Value rebound and cyclicals rally, and the prospects for these year-to-date laggards as we head into the new year.

In November, concerns about rising cases gave way to ‘vaccine euphoria’ after the three front runners in the race to develop a viable coronavirus vaccine, reported high levels of efficacy in late-stage trials.  

With the promise of a return to growth in 2021, and fiscal and monetary policy bridging the gap until vaccines become widely available, growing investor risk appetite saw global equities deliver the best monthly return on record.

During the month, the MSCI AC World Index finished up more than 12% in US dollar terms.

All major regions delivered positive returns, and the ‘risk-on’ rally prompted a cyclical rotation, with some of the weakest performers year-to-date proving the strongest performers in November. In terms of style, value outperformed growth, while smaller companies pulled ahead of their large cap counterparts.

Eurozone equities led the gains, and UK equities followed closely behind, with cheap relative valuations and a potential UK-EU trade deal attracting investors. In Japan, the Nikkei also outperformed the wider global index over the month.

Asia ex-Japan and Chinese A shares were the weakest performers, and US equities were also relative laggards – but remain among the strongest gainers year-to-date.

Elsewhere, Italian 10-year government bonds gained ground, along with global high yield bonds, while US 10-year treasuries remained largely flat and the US dollar weakened against a basket of currencies.

In commodities, Brent crude staged a strong recovery – finishing the month above $47 per barrel – but it remains down nearly 30% year-to-date.

Sector returns in US dollar terms were positive across the board, with energy and financials seeing the strongest rallies, fuelled by a surge in risk appetite. Laggards in November included more defensive areas such as telecoms, consumer staples and healthcare.

From a style perspective, while Growth has dominated Value, most noticeably since 2016, the pandemic has accelerated the dominance of Growth in 2020.

As investors chased COVID beneficiaries, companies able to adapt to – and service – the growth in e-commerce, along with the increased use of cloud services, streaming and communication technologies, have been some of the strongest performers year-to-date.

Stocks in those areas most impacted by the measures taken to curb the outbreak – including energy, industrials, ‘bricks and mortar’ retailers, hospitality, and travel and tourism names, in particular – have been hit the hardest, while the low interest rate environment has continued to weigh on banks’ profitability.

However, by mid-November, with US political risk receding and hopes of further fiscal stimulus on the horizon, the subsequent news of a ‘trifecta’ of positive COVID-19 vaccine results, proved just the ‘shot in the arm’ some of those earlier beaten-down value and cyclical stocks needed.

Value outperformance was particularly pronounced in the UK and Europe while Quality, Growth and Momentum factors underperformed.

To some extent, the regional skew reflects the make-up of indices – with smaller weightings to technology stocks, for example, and larger exposures to those sectors most likely to benefit from the reflation trade. Banks and energy alone make up more than 30% of the FTSE All Share index¹.

Both the UK and Europe have been regional laggards this year, but as sentiment improved, many investors looked to take advantage of the cheap relative valuations.

Whether or not an early cyclical tailwind acts as a catalyst for a more enduring style rotation remains to be seen. However, the absence of any bad news as we head into year-end could further fuel investor risk appetite and provide another leg up for the year-to-date laggards and those neglected Value names.

While many COVID beneficiaries continue to enjoy share price support – with the prospect of a return to some sense of normalcy in 2021 – current lofty valuations and any concerns about earnings sustainability, could see investors looking for greater valuation support and attractive entry points as we head into the new year.

¹ Please note, this weighting refers to the combined ICB Industry-level weightings of Financials and Oil & Gas in the FTSE All Share Index as at 30 November 2020

By Kirsty Clark

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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