Over the past few months, we’ve heard plenty about the rotation to value putting pressure on growth stocks. Is it just beginning, is it fairly advanced, or is it someplace in between? Global recovery, should it continue, will generally help “value” or slower-growing established businesses, as it pushes long-term rates up and investors therefore put a higher value on cash and cash-generative businesses. COVID resurgence, on the other hand, threatens recovery, depresses long-term rates and supports the valuations of conceptual, particularly virtual businesses.
But what if global recovery does continue? It depends on inflation and its effects on bond yields and the yield curve. We have seen a spike in inflation largely because there is lack of supply alongside abundant stimulus and demand. Looking ahead, we believe inflation will settle down at a more normal level. Based on our analysis, the style rotation is fairly well advanced and I prefer to think of it less in terms of growth versus value, but in terms of conceptual stocks, which don't necessarily have earnings, versus companies that have more stable or more predictable cash flows. Some of those more conceptual stocks have lost value over the last few weeks, but I do see the pace of that decline slowing down and actually offering good opportunities to get into some of these businesses at a better price.
Robert Horrocks, PhD
CIO and Portfolio Manager
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