Last year’s strong outperformance in cheaper, so-called value stocks over growth peers is likely to reverse soon as the economic recovery slows, say JPMorgan Chase & Co. strategists.
(Bloomberg) — Last year’s strong outperformance in cheaper, so-called value stocks over growth peers is likely to reverse soon as the economic recovery slows, say JPMorgan Chase & Co. strategists.
A market favorite in 2022, the value trade is starting to lose its sheen. The next move for investors in the following month or two might be to go “outright underweight value versus growth,” the team led by Mislav Matejka wrote in a note.
“Our core view is that in the second half, market will be moving back to the recession trade, but even if the opposite scenario gains traction, value might not be the best place to be,” he wrote on Monday.
Value stocks have started to stall against growth peers recently, after outperforming them last year by the most since the dotcom bubble of 2000. While the cheaper shares got a boost from rising bond yields and inflation, investors are starting to price in more hawkish policy, which may reduce support for the trade as yields peak.
Value stocks such as financial and commodity companies surged since the market low in September, while at the same time, rising rates weighed on growth stocks as highly valued sectors such as technology suffered from a profit squeeze. Initially, the trade was also supported by better-than-expected macro data.
But now, Matejka says, economic activity momentum is likely peaking and could be rolling over soon, while stalling inflation expectations suggest the value factor shouldn’t fare so well relative to growth from here on.
The strategists currently hold a neutral stance on value versus growth. While they see the cheaper stocks as more interesting than growth peers on a two-to-three years horizon, they expect the group to weaken this year.
“Better relative tech performance than what transpired last year would ensure value factor is not a winner this year,” Matejka wrote.
But to BlackRock Investment Institute, value stocks can resume their climb as major central banks keep rates higher for longer after growth stocks led the US rally so far this year. Strategists led by Wei Li argue that higher borrowing costs reduce value of future cash flows, weighing more on growth stocks.
To Li, stubbornly high inflation “is likely to lead investors to demand more compensation for holding long-term government bonds, driving yields higher,” she wrote in a note to clients on Monday. “Value tends to outperform when the yield curve steepens.”
–With assistance from Kit Rees and Jessica Menton.
(Updates last two grafs with BlackRock’s view)
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