Value rally set to run further as economic bounce-back becomes consensus trade

Investors should expect the ‘vast chasm’ between value and growth to close further


As the reflation trade in markets continues to play out, investors have been told to expect the rally in value stocks to continue, while growth companies are expected to keep stuttering.

Value stocks have underperformed growth for much of the last decade, but Adrien Pichoud, manager of the Oyster Absolute Return fund, says investors should expect the “vast chasm” between the two styles to further close as the dynamics for a reflationary environment remain in place.

“We believe the world will remain in a low growth, low-rate environment,” says Pichoud (pictured). “But there will be periods where inflation increases due to an evolving and volatile macroeconomic picture. We are now experiencing such a reflationary spike, and this may accelerate and continue for some months to come.”

So what is causing this spike and which assets will be most effected?

Consensus trade

Pichoud said that while business activity in the eurozone contracted again in February, as lockdown measures restricted the bloc’s dominant service industry, key surveys indicate factories had their busiest month in three years.

“This is a positive development underlining that while overall business activity may be subdued or even deteriorating, it is not collapsing as was the case in the first lockdown, when the world’s economies fell into the abyss,” he says. “This means the dynamics for the reflation scenario remain in place, both in terms of growth and inflation.”

Indeed, Pichoud adds a firm bounce-back is now arguably the consensus trade and that a boost to this narrative is the introduction of strengthening economic data coming from the US in terms of household consumption.

“The fiscal stimulus cheques now arriving through the door will further strengthen purchasing power and should lead to an acceleration in demand during the spring,” he adds.

Good for equities

According to Pichoud, this scenario will provide a constructive platform for equities – particularly in cyclical sectors and among classic value plays; such as industrials, materials and financials. In parallel, he is cautious on global fixed income assets, given renewed momentum in long-term rates, while technology and quality equity names will continue to be buffeted.

See also: Reflation trade has made corporate bonds a tough place to invest

“With this backdrop in mind, we have continued what we started last November – repositioning the portfolios towards more cyclicality, reducing technology stocks and adding to financials, materials and industrials,” he said. “This has allowed us to take profits and reduce our tech exposure, some of which was adversely impacted by the rise in long-term interest rates.”

Pichould has also added to his fund’s financials position as a way of getting global exposure to banks that will benefit from rising interest rates.

“Their massive underperformance in the last decade will probably never be fully recouped, but we are at a tactical inflection point, and a reflationary mini-cycle will be a big tailwind for the sector,” he says.

How long and how much?

Ryan Hughes, head of active portfolios at AJ Bell Investments, says while he is not in the camp of expecting inflation to get out of control, he does believe that it now seems clear inflation will shift higher and in all likelihood, stay slightly elevated for some time.

“After all, the Federal Reserve has told us they are comfortable letting it run hot for a little while before they plan of raising interesting rates to rein it in,” he says. “The key question is when is this point reached and what will the magnitude of change be.”

Like Pichould, Hughes says this should be good for cyclicals and will likely mean the current value rally continues, not least because it still remains hugely undervalued versus growth after such a long period of underperformance.

“We recently added energy stocks to our portfolios alongside some existing positions in value managers to benefit from this and see no reason to lock in short-term profits at this stage,” he says.

While equities and the return of inflation look well supported in the coming months, Pichould adds that he is always keeping an eye on anything that could threaten this scenario. This, he says, also means keeping the fund’s protections in the market, so if the market experiences an acute drawdown, its losses will be limited.

“In the scenario where rates move far faster than the market expects, we could see some strong market gyrations, and it pays to have the appropriate market protections in place,” he said. “We also maintain a gold position. A safe course means never sailing too close to the wind.”

For more on international financial planning, please visit


Latest Stories