Last month I wrote an article for New Model Adviser that suggested investors should be tilting their portfolios towards Value as a style.
It followed the MSCI All Country World (ACWI) Momentum Index increasing exposure to Value as a factor. Typically, Momentum and Value are negatively correlated. This makes sense as Momentum, by definition, buys stocks after they’ve already gone up in price and so are less cheap.
This means that usually, the MSCI ACWI Momentum will underweight Value as a factor and this was certainly true prior to a rebalance in May.
However, Value had been performing very strongly and this was reflected in the May rebalance which resulted in MSCI ACWI Momentum moving to a slight positive to Value from its previously strong underweight. Because Momentum has historically performed very well, this argued that Value was more likely than not to keep winning as a style.
That was early June, what about now?
At the time of writing the article I did point out that whilst history suggested winners tend to keep winning, nothing is certain. It was certainly still possible for Value to start underperforming again with growth, tech and the US moving back into the ascendant.
And this did happen to a certain extent in June with the reflation trade (code for higher, but not too high, inflation and higher growth) coming under pressure after some doubts around the strength of future growth set in.
This was due to delta variant increases, fears around Chinese growth and worries about some fiscal stimulus measures such as furlough being withdrawn in the UK and additional unemployment insurance being withdrawn by certain US states.
The reflation narrative was also knocked after the US Fed’s June meeting when the majority of the committee indicated that they expected two rate rises before the end of 2023, more aggressive than previously expected and therefore likely to lead to lower future inflation.
That said, there are signs the market may be complacent over a return to lower inflation and that growth concerns may be overblown.
US inflation for June came in at a higher than expected 5.4% whilst UK inflation for the same month came in at 2.5%.
These upticks are suggestive of inflation not being as transient as markets expect.
In terms of economic growth, thankfully vaccinations do seem to be staving off the worst effects of delta (hospitalisations and deaths) in the UK which is a model for countries with high vaccination rates. If we can learn to live with the virus then this looks positive for global growth too.
So, whilst caution is warranted, we’re still optimistic that there is still life left in the reflation trade, and hence we still think a tilt to Value makes sense.
