Where growth stocks won the “battle” of value stocks for many years, value stocks recovered well late last year. Although growth stocks have recently regained ground, several fund houses are still expecting a continuation of the rally by value stocks.
T. Rowe Price, for example, sent out a market outlook last week in which it wrote to stick with value stocks despite the recent gains by growth stocks. According to the fund house, the valuations of growth stocks are too high and value stocks have a chance to get some support.
Capital markets strategist Tim Murray clarified that the very strong revenue growth of growth stocks relative to value stocks may not hold up. In particular, the tech trends that growth stocks have benefited from over the past decade have been amplified by the pandemic and have helped push valuations of growth stocks to extreme levels relative to value stocks, the strategist said.
Potential catalysts, such as higher inflation and rising interest rates, could narrow that gap in the medium term, he said. That, plus higher government spending, higher taxes on foreign profits and tighter regulation of technology companies, favors value stocks and could be detrimental to growth stocks. Therefore, T. Rowe Price maintains its preference for value stocks.
Van Lanschot Kempen
Van Lanschot Kempen also remains positive on value stocks. They are over-represented in sectors that suffered greatly from the coronavirus pandemic,’ said chief economist Luc Aben in the bank’s asset allocation update in mid-August. ‘If the recovery continues, style rotation could pick up. For these reasons, we are putting an emphasis on European equities.’
The bank still has an emphasis on equities in its asset allocation anyway, because of the economic outlook, central banks’ cautious stance on tapering and support from corporate profits.
Financials and value: BofA
Bank of America is also more positive on value than growth, a market view from the bank revealed a week ago. ‘We remain overweight in financials and value versus growth,’ said investment strategist Sebastian Raedler. ‘Although the strength of the dollar will weigh on oil prices and thus inflation expectations, we still see an upward trend for U.S. 10-year yields. This offers support to financials and value stocks, given the scope for a rise in real bond yields as central banks begin to wind down monetary policy accumulation.’
Fidelity wrote back in July that it still saw opportunities in the value-oriented part of the market. ‘The bump in the road in June in the form of hawkish statements from the Fed’s policy committee about an earlier rate hike pushed investors back into growth stocks, listed head of Multi Asset Investment Management Matthew Quaife.
Interest rate hike
It was a reaction that was not entirely justified, according to the investor, as an earlier-than-expected rate hike is still likely to be marginal. ‘And although we are past peak growth rates, there should still be a robust economic expansion in the U.S. this year, which should support cyclically sensitive value companies.’
Another argument in favor of value stocks, according to Quaife, lies with an infrastructure spending package that the U.S. is likely to approve later this year. ‘That will support economic growth and commodity prices,’ the investor says. That, plus a rapid rollout of vaccines in the U.S., makes Quaife count on a further rally in value stocks.