The rotation into value stocks has a long way left to run, JPMorgan and Barclays say

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  • 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.

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The Fed needs to convince stock investors that their rate hike expectations are priced in ‘too aggressively’, Barclays says

Federal Reserve
  • The Federal Reserve will hold its two-day meeting on March 16 and 17.
  • The Fed has work in relaying its message that pricing of rate-hike expectations is too aggressive, says Barclays.
  • Large-cap tech and growth stocks may continue to see underperformance, the bank’s head of US stock trading says.
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The Federal Reserve will likely keep working to convince equity investors that expectations are being priced in “too aggressively” for when the central bank will start raising interest rates and how fast those changes will occur, according to the US head of stock trading at Barclays.

The Fed’s two-day meeting starting on March 16 will be held at a time of notable rotations in equity markets, spurred in part the quick rise in borrowing rates this year as tracked by some Treasury yields. Yields have pushed higher in part as investors anticipate a rise in inflation as the US economy recovers from the COVID-19 health crisis.

As yields climb, so do expectations for when the Fed will start raising its benchmark interest rate which currently sits at a range of 0%-0.25%.

Growth in the world’s largest economy is a supportive factor for stocks, and rising rates to reflect growth “shouldn’t be a headwind for equities,” said Michael Lewis, head of US cash equities trading at Barclays, during the bank’s teleconference about inflation on Tuesday.

But “the velocity of the move in rates that we saw, or the rate of change in the move that we saw, spooked equity investors,” he said.

Lewis said he recalled at the start of 2021 seeing about 31.5 basis points of rate hikes priced into year-end 2023, “and then we went almost to above 90 in just a handful of weeks. That’s a massive move in terms of what people are expecting the Fed to do, what the market is pricing in,” he said. “And if you are going to get hikes to that degree and velocity and in that timeframe, that is negative for equities.”

However, “if you look at the dot-plot, there’s no liftoff expected through 2023, it’s in 2024,” he said. The dot-plot is the Fed’s way of signaling its interest-rate outlook.

“So the real job…is for the Fed to walk people off that cliff,” he said, adding that a lot of the central bank’s commentary so far “hasn’t been successful in convincing the markets that they are pricing in these expectations a little too aggressively.”

Lewis expects the Fed “will find a way to walk that back”, including discussing at next week’s meeting its preferred inflation measure, the PCE price index. That index “is a good 30 to 40 [basis points] lower” than the consumer price index. Also, the Fed can discuss near-term inflation versus longer-term inflation, he said.

Looking ahead, Lewis said he expects investors to continue to see large-cap tech and growth stocks underperform over the course of the next 12 to 18 months in favor of more cyclical-type stocks.

“But given the velocity and the rate of change that we’ve seen in the rates market …counterintuitively over the next week or two if you see a bounce in equity markets, it’s going to be led by growth and tech,” because of their recent and steep selloffs, he said.

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Tesla shares are being driven more by Reddit posts rather than the automaker’s fundamentals or valuation, Barclays study finds

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Tesla CEO, Elon Musk.

  • Tesla’s stock performance is positively correlated to the number of Reddit posts citing TSLA, Barclays found.
  • The automaker has seen outsized attention from retail investors with active discussions on social media. 
  • “We have painfully learned that social media memes can matter more for TSLA share performance.”
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Tesla’s stock performance might just be linked to online chatter over the automaker on social media forums like Reddit, according to a Barclays study released on Tuesday.

“On the autos team, we have painfully learned that social media memes can matter more for TSLA share performance than actual financial metrics, fundamentals or (dare we say) valuation,” strategists Ryan Preclaw and Brian Johnson wrote.

Barclays examined data on the Wall Street Bets subreddit to find big upticks in posts about Tesla have been predictive of stock returns a few days later. “In the model we think is most appropriate, a swing up of 7 or more submissions today over yesterday has been predictive of outsized returns in TSLA stock tomorrow,” the investment bank said.

The strategists laid out a scatter plot that suggests there is at least some relationship between attention on Wall Street Bets and Tesla returns. In conducting the analysis, Barclays focused on posts that reference either $TSLA or TSLA (in all caps), and no other identifiable ticker. 

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The strategists said there are statistically significant relationships between the number of returns and the absolute number of posts one and two days earlier, and between changes in post counts and following days’ returns.

“However, all of this analysis is ‘in sample.’ The situation has been so dynamic that there are simply too few examples to be confident of a stable process between WSB posts and TSLA returns,” Barclays said. “Even more than usual, past results might not predict future performance.”

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Tesla tumbled as much as 20% this week, making CEO Elon Musk relinquish his title as the world’s richest person. Shares in the EV-maker sank after the company halted new orders for its cheaper version of the Model Y crossover. The drop was also partly driven by Musk tweeting that the prices of bitcoin and Ethereum “do seem high” after their recent rallies. Tesla was trading 1.6% lower, at $730 per share, in pre-market trading on Thursday.

“With only 2-3 total submissions on each of the past several days, we remain below the trend in attention that has come along with big returns jumps in the past,” Barclays said. “It remains to be seen if WSB posters bring their attention back to TSLA anytime soon.”

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