The key discussion driving global markets of late is this idea of reflation and the value vs growth debate in equity markets that I discussed in a previous article.
Essentially, a rotation out of the growth stocks (technology-driven amplified by a near-zero cost of money) and into value stocks (more traditional tangible assets with less growth potential). So how has this played out in the first quarter of 2021?
Although on the surface, 1Q'21 was placid for global equity markets, with MSCI AC World delivering ~4 per cent with average volatilities, underneath the hood there was a great deal of churning and movement going on. Until midway through February 2021, the first quarter progressed much as in the previous decade, with short-lived and shallow equity value support, replaced by stronger growth spurts. As a result, value outperformance post-Pfizer (November 2020) was largely negated, and growth ended up in line with value.
However, as yields (interest rates) rose globally and confidence improved, value styles moved aggressively against growth. Since 18 February 2021, global growth has fallen vs value by ~8 per cent.
What should investors expect moving forward?
As economies reopen, and the headlines of a strong recovery resonate, there should be further equity value rallies. However, as always, it is better to buy the rumour than the fact, and I expect these rallies to become less intense. Can reflationary and inflationary pulse be maintained beyond several quarters? This will depend on fiscal and monetary policies.
I disagree with the notion that COVID and fiscal spending is risking overwhelming the US.
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In my view, technology, demographics and changing nature of jobs are melting away constraints at a rate faster than at any time in modern history, explaining why a lot of traditional economic modelling does not work. For example, battery prices can fall even as commodities rise or how we can deliver surges in shale gas that would have been impossible in previous cycles.
It is important to keep a global rather than just US-centric view, with greater disinflation in Eurozone, Japan and China offsetting some of the US surge. Hence, an inflationary spike concerns me less than a premature or hasty withdrawal of fiscal and monetary supports.
The challenge is that both fiscal and monetary impulses for G4 are likely to fall over the next two years. This will create a significant headwind particularly as most fiscal responses have been structured as temporary measures.
Also, monetary policies will be coming under pressure from rising (albeit transitory) inflation. While there is still life left in value stocks globally, we think that gradually re-weighting into growth themes, in conjunction with staples, is a better strategy.
- Mark Fowler is the Head of Investments at Hobson Wealth. This article contains market commentary and factual information only and does not constitute financial advice.