GB-EN Intermediary

Value stocks stage a return

It’s still early days, but it looks as if value stocks could be coming back into vogue again.
October 2021
Peter Hewitt

Peter Hewitt

Director, Portfolio Manager, Multi Asset Solutions

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Risk Disclaimer

The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

We’ve been here before over the past 18 months, of course, and there have been several so-called ‘rotation’ cycles during this time. These trades involve investors switching their preference between growth investments, in sectors such as technology and healthcare, and value shares, including industrials, retail and leisure.

First, it was growth shares that flourished, performing really well during a two to three-year period when bond yields were low and investors were seeking out racier returns. Technology stocks were also seen as among the big beneficiaries of the global pandemic, as the world went into lockdown and we were all forced to work from home.

All change

That all changed last November following the big early success of the vaccine rollout programmes, and amid hopes of a speedy economic recovery as countries reopened, cyclical value shares roared back into fashion.

That ‘value rally’, as you might call it, continued until the end of May, when bond yields, which had been rising in the US, and also to an extent in the UK and Europe, abruptly went into reverse and sentiment changed again. Over the summer months – June, July, August and September – it was growth stocks that were back in demand.

History repeats itself

Then, in the middle of last month, it started to look as if history was repeating itself – the ball was back in value’s court. Several factors have been at play: supply shortages, rising demand, increasing scepticism among investors that inflation is going to be transitory, and surging energy prices.

But a key issue is also wage growth. If the widespread labour shortages we are seeing lead to higher real wages, this could mean that the inflationary environment that’s now with us lingers for longer.

None of this is good news for the secular growth sectors and companies that are out of favour once more as a result. Businesses such as Microsoft will still do just as well in terms of earnings; it’s just that falling share prices mean that these companies’ stock market ratings are on the wane.

There’s still plenty of uncertainty about this apparent trend – slowing economic growth could still hold inflation back, for example – but it may mean that some value sectors, and companies, could be on course to perform well.

What to do with the portfolio

I’ve therefore been reweighting some of my holdings – ‘top slicing’ or taking profits on some of my big growth positions, for example, in Polar Capital Technology Trust. I’ve been using the proceeds to top up some of my investments in UK equity trusts, particularly those with a bias towards value stocks, mainly in small and mid-sized domestic companies that are likely to benefit from the renewed shift in investor sentiment.

Among the investment trusts where I’ve increased my exposure are Fidelity Special Values, Law Debenture and Diverse Income Trust. I’ve already got big holdings in all three trusts, but I’ve been adding to them in recent weeks.

To be clear, I still believe in the big technology-driven holdings that I have in the portfolio over a longer-term period – 10 years, for instance. Over that timeframe and longer, they’ve been among my best performers.

As things stand, however, it’s looking increasingly likely that, at least in stock market terms, their performance will be held back over the next one, or perhaps two, years.

Risk Disclaimer

The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

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