Is the value trade already over?
The cyclical trade in equities may already be waning, according to AXA IM, in a rising equity market with investors going back into growth stocks.
According to Chris Iggo, chief investment officer for core investments, energy and financials had been strong performers recently but there were question marks around their future outperformance.
This was due to possible carbon taxes impacting oil prices and movements in the US Treasury market affecting financials.
“Look at two value/cyclical sectors in the S&P – energy and financials. Both have outperformed the market with energy delivering a 2021 total return of 48% and financials 27.2% compared to the 13.6% for the market. The macro drivers are clear – the huge rally in oil prices and the steepening of the yield curve which boosts bank earnings,” he said.
“Oil prices are up because global oil demand is returning to pre-pandemic levels and supply has probably been impacted by COVID and shifting capex towards renewables.
“But what if there is discussion of a carbon tax at COP26? Can oil prices double again? I doubt it. For financials, if the US Treasury market is going to stay in a range or if yields move even lower, the yield curve momentum fades away.”
This presented an opportunity for investors to consider bonds, particularly short duration bonds.
“Bond performance has caught many offside in the last month or so and calling for even lower yields is challenging given the inflation backdrop. But rather than the end of year seeing a Treasury yield of more than 2%, the market might stay range bound. Inflation will be higher, the Fed will be ok with that for a while, and short duration inflation bond exposure will be an attractive strategy.”
AUTHOR
Laura Dew
Recommended for you
Perpetual has appointed a new CEO for affiliate J O Hambro Capital Management, as it tries to stem outflows and refresh the brand.
Outflows of US$1.4 billion from its US equity funds have contributed to GQG Partners reporting its highest monthly outflows for 2025 in August.
Domestic equity managers are lagging the ASX 200 in the first half of the year, according to S&P, with almost three-quarters of Australian equity funds underperforming over the six-month period.
ETFs saw almost $5 billion of inflows during August, with international equities gaining double those of fixed income funds, as total assets close in on $300 billion.
