- JPMorgan and Barclays say the rotation into value stocks should continue as economic growth continues to accelerate.
- Rising bond yields and inflation should boost banks in particular, JPMorgan analysts said.
- The MSCI Value index has jumped 8.7% this year, while the growth index is broadly flat.
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The global rotation into value stocks has further to go as countries reopen after the coronavirus pandemic and consumers start spending again, according to JPMorgan and Barclays.
Value stocks – or cheaper shares such as banks and energy firms – have handsomely outperformed fast-growing stocks such as the big tech names in 2021 so far.
The MSCI World Value index was up 8.7% year-to-date on Friday compared to 0.04% fall in the MSCI Growth index, Bloomberg data showed. Stocks such as Bank of America and Exxon are beating the likes of Tesla and Amazon.
The strong performance has led some investors to question the rally. But banks including JPMorgan and Barclays are saying previously unloved stocks will continue to climb as stimulus and vaccines power a recovery.
“Value continues to look very appealing, especially the banks,” JPMorgan analysts including Mislav Matejka said in a note on Monday.
They said the moves in value stocks are still well below what has been seen in past economic recoveries, suggesting they still have further to rise.
Analysts at Barclays, including Emmanuel Cau, said in a note that “value still has significant catch-up potential” because a “longer term rebalancing within the equity market may be underway.”
They said that after a decade of fast-growing technology companies dominating the markets, a strong economic recovery could cause a major shift.
Rising growth and inflation expectations – thanks to vaccines and stimulus – are pushing up bond yields, weighing on growth stocks.
“Higher rates naturally call into question the high (future) expected growth of these stocks trading on high valuations, as both future cash flows and the valuation look to be worth less today,” the Barclays note said.
The analysts said that stronger growth expectations are also pushing up earnings expectations for value companies, which tend to be more sensitive to the economic cycle.
JPMorgan said banks, which broadly benefit from higher market interest rates, “remain very attractive in a long term context.”
The Barclays analysts said they thought that growth and inflation “may even surprise” in the second half of the year.
They recommended investors use any dip to add to positions that stand to benefit, such as mining stocks, consumer-focused firms, and financials.
However, JPMorgan said rising bond yields and inflation could push up the US dollar, which may weigh on emerging-market companies and miners.