We are at an important junction where the global economic recovery has largely been priced into markets. Investors are already anticipating inflation going up and Treasury yields rising further. So, the shift to value and to the more cyclical parts of the market – resources, energy and banks – has arguably played out to some degree.
Mid-January is an interesting inflection point, as in many ways this period represents the peak of good news – the uncertainty of the US election was removed; Biden was inaugurated; there were more positive developments on the vaccination front; and there was widespread optimism about economies re-opening. So, market movements already reflect the anticipated recovery to a large extent.
We believe there is a lot of value in quality stocks. Conversely, there is not much quality, and less value now, in value stocks. Interestingly, the global quality stocks in our portfolios are now the cheapest they’ve been in the last 10 years – whether you consider free cash-flow yields or even PE multiples.
Value investment strategies typically do very well in a short space of time when expectations of an economic recovery gain a foothold. We clearly saw that happening late last year. Going into value now, could mean moving once the horse has bolted.
Over the last few months, markets have been pricing in a more inflationary environment. The conventional wisdom is to own commodity stocks and energy stocks as these will do better in an inflationary environment. But what is not well understood is that quality stocks are pretty well placed in an inflationary environment. This can be attributed to their:
We are not in the business of timing markets. The Ninety One Global Franchise Fund is -diversified by sector and geography, and well balanced to include exposure to select quality cyclical companies as well as more defensive businesses and structural-growth compounders (such as high-quality capital-light financials like savings platforms and wealth managers). In addition to valuation discipline (quality at a reasonable price), this helps to mitigate the impact of any style rotation in the short term. We still expect quality to outperform over the longer term. Importantly, we think the market has already priced in a lot in terms of reflation and rotation towards value/cyclical stocks.
Click here for more information about the Ninety One Global Franchise Fund. BM/DM
This article was written by Clyde Rossouw, Head of Quality, Ninety One
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