Look to value stocks as the Fed readies rates rises
The equities market has rotated from growth into value, according to VanEck, following confirmation from the US Federal Reserve that it will soon raise its target range for the federal funds rate.
Russel Chesler, head of investments and capital markets, VanEck, said the US Central bank’s decision to reduce the monthly pace of its net asset purchases and bring them to end in early March, was faster than the market expected – bumping the 10-year US government bond rate from 1.77% to 1.87%.
“Since the 19th of November 2021 when the NASDAQ 100 peaked, the 10-year US government bond rate has increased from by 1.55% to 1.87% off the back of rising US inflation which hit 6.8% at the end of the year,” he said.
“This has resulted in a rotation away from growth stocks into value. Value stocks have outperformed growth stocks by a massive 17.45% since 19 November 2021 when the general market has been in negative territory.”
Source: Bloomberg
During times of inflation, Chesler said companies with actual earnings could boost profit margins by raising prices while value companies, which tend to be more mature, had earnings and margins to improve.
“It is much more difficult for non-profitable companies to increase prices. So, in the current environment they are more attracted to profitable companies,” Chesler said.
He said investors should follow a prudent investment strategy that focused on fundamentals rather than “visionary growth companies”, many of whom were unprofitable.
“Historically, value companies have outperformed when inflation and interest rates increase, as they are less sensitive to changes in macro-economic conditions.
“High inflation and rising rates were characteristics of markets in the late 70s and 80s, when value stocks outperformed.”
Source: Bloomberg
“In Australia we have seen a similar jump in the 10-year government bond, which has now breached 2% and is yielding 2.06%,” Chesler said.
“With inflation at the 3.5% per annum level it is impacting on input costs. Australian companies that can maintain or increase margins without impacting on demand will be the ones which will win.”
AUTHOR
Liam Cormican
Recommended for you
Two ETF fund managers have opted to switch away from Cboe and onto the ASX in search of better broker connectivity.
The former CEO and co-founder of Zenith Investment Partners has switched sides and moved in-house to take up an executive role at a listed fund manager.
The “experiment” away from vertical integration has been a mistake, according to Clime’s Michael Baragwanath, and Clime is positioning to benefit via advice and fund manager acquisitions.
JP Morgan Asset Management has identified Australia as an “emerging growth market” as it seeks to double its assets under management in the Asia-Pacific region in the next five years.
