What can we expect from here? The rotation has already been strong in anticipation of the global growth recovery, helped by massive fiscal stimulus packages and financed by ever-more dovish central banks and strong household savings. Although some deep, cyclical areas have already recovered from their lows (e.g. automobiles, technologies, mining, China exposure), pockets of opportunity still exist in re-opening themes, financials, energy, or some stocks exposed to consumer services but despite the spectacular reversal, the value factor rebound has lagged the move in cyclical stocks. Furthermore, positioning in value styles is still low. The momentum from recent earnings revisions turned in favour of value baskets and relative valuation (and the still-very-expensive growth and quality factors) still favours value.
Value strategies that are positively correlated with rising bond yield (the opposite of long-duration trades like technologies and growth style) are providing investors a natural bond risk diversifier and hedging vehicle. So far, the rise in bond yields has been rather modest by historical standards. Further normalisation can be expected, but value strategies have undershot the rise in yields. Confidence has been increasing with vaccine efficacy and a steady rollout will soon allow economies to re-open, unleashing huge pent-up spending and investment demand. Inflation expectations are rising quickly, as the price of commodities has been surging and supply-chain shortage pushes pressure downstream. In this environment, steepening yield curves will be supportive (graph5), as will the general reduction in policy uncertainties (graph6). Equity rotation will benefit from a tailwind from rate markets. High-multiple stocks will stay under fire as rates erode their value.
