Is there a shift in market dynamics from growth to value?
10:02, 11 February 2022
Is the rotation from growth to value stocks finally with us?
As Vincent Ropers, portfolio manager of the Wise Multi-Asset Growth fund argues, the long overdue slump in US tech stocks is being hailed as a ‘great rotation’ from ‘growth’ and ‘momentum’ to ‘value’.
Ropers suggests we may be witnessing a significant shift in market dynamics.
“We have been here, many times, before. Since the global financial crisis, there have been a number of false dawns for Value, most recently in Q4 2020 after the announcement of Covid vaccines. But now we are seeing signs there are potentially seismic shifts in the investment landscape,” he says.
The portfolio manager contends that with valuations high for the main indices, central banks showing resolve in combatting inflation, year-on-year growth comparatives set to disappoint after last year’s strong rebound and geopolitics presenting increasing risk, investors have started the year on a nervous footing, quick to liquidate their positions. He says: “First on their list of sell orders, US technology stocks represented by the Nasdaq Composite Index almost entered a bear market this week (a drop of more than 20%) from their high on 22 November.”
Impact of the Fed
In terms of the key drivers behind the major shift in investor sentiment, Ropers points to central banks and, chiefly, the Federal Reserve. In particular, the Fed’s announcement this week signalling rate hikes and a path to monetary normalisation also effectively removes the market backstop – further quantitative easing and rate cuts.
“This combination significantly darkens the outlook for growth stocks and fixed income securities. This is because historically, the higher the interest rate, the higher the discount rate used in valuation models and the lower the value of future growth when brought back to today. While higher rates have the effect of eroding the income from bonds paying a fixed coupon,” he says.
Conversely, says Ropers, with less worth assigned to future growth, value companies look increasingly attractive, particularly when their business models are sound and their valuations remain at historically low levels both in absolute and relative terms.
“Investors, having joined the fast-paced technology train late and suffered heavy losses, might be prompted to jump ship to protect their eroding capital, while earlier passengers might naturally want to recycle their gains into the next big thing. This could be the beginning of a great rotation indeed,” he says.
Alberto Matellán, chief economist at MAPFRE Asset Management, agrees that the companies that were down through the month were those that performed better in 2021 and that these were mainly technology companies.
He also points to a more aggressive monetary policy being applied, which more acutely affects companies that are not reliably earning long-term profits, notably tech.
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Tech still of interest?
However, despite this setback, Matellán still sees an upside in the tech sector.
“It was a good year in 2021, but they haven’t necessarily peaked. Some specific companies may likely have peaked, but the technology market has yet to translate into profits the enormous liquidity that has been generated in recent years.”
There is also a danger in seeing technology companies as a homogenous group – when the reality is some way from this.
Andy Brown, investment director at Abrdn, argues that companies like Apple are more akin to a consumer staple business, and foundries such as TSMC are essentially hi-tech industrial companies. “What is true, however, is that these companies are enablers of much bigger changes in our world. They often sit at the apex of major shifts in the way we live our lives, and interest rates going up isn’t going to change that,” Brown says.
As Capital.com reported last week, David Coombs, head of multi-asset investments at Rathbones, believes there is also an important distinction between ‘growth’ and ‘speculative growth’ tech stocks.
“While I have concerns about the latter, I am happy to invest in businesses which are profitable, cash flow positive, exhibit a strong growth trajectory, earnings momentum and dominate their sectors. They include Adobe, Microsoft and Ansys,” Coombs says.
For asset managers like Ropers who are inclined to support a shift from high growth to value stocks – how is he positioning his portfolio right now?
“We like having exposure to commodities, which is traditionally a good inflation hedge, and combine our broad mining exposure above with a specific gold and silver fund (Jupiter Gold & Silver).”
He adds: “Not only do precious metals usually perform well in an inflationary and volatile environment, but precious metals mining companies offer strong balance sheets, high cash flow generation and trade particularly cheap relative to the rest of the market.”
Dividend producers
If investors are looking to de-risk or prioritising steady dividends over capital growth, then companies like BAT and Tate & Lyle will be watched closely.
Today, Tate & Lyle confirmed the sale of a controlling stake in its Primary Products business in the Americas at the end of March 2022.
Following completion, the board intends to return approximately £500m ($678m) to ordinary shareholders by way of a special dividend with an associated share consolidation, subject to shareholder approval. Tate & Lyle’s stock price rose 5.88% by mid-morning trading to 730.80p.
BAT reported a 2.7% increase in profits today (£10.23bn) and on the back of this announced a 1% increase in dividend per share to 217.8p.
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