Time for value stocks to shine?
Will the long running story finally come true? Will value stocks outperform growth stocks this year and beyond? After underperforming growth for most of the last 15 years, value stocks have outperformed growth stocks so far this year. In the large cap space value is up around 14% while growth is flat year to date.
There are two main reasons for this reversal. The first is that the cyclical sectors that are set to gain the most from reopening economies, namely financials, industrials, energy and materials are value stocks. These sectors are faring very well so far and will continue to thrive as economic growth picks up globally.
The second reason is the rise in yields which is happening because the global economy is expected to strongly recover. The last two weeks have seen a big selloff in bonds which consequently shot up interest rates. In this scenario, investors are less inclined to bet on growth stocks and pay high multiples if interest rates are higher. The result is a selloff in growth stocks and inflows in the sectors that are poised to do well in 2021. Financials are also beneficiaries of higher interest rates.
While the future looks brighter for value stocks in 2021, it may not be a lasting one. A similar phenomenon with interest rates happened in 2016 and the reversal lasted about a year. Nevertheless, an allocation to value stocks and specifically sectors benefitting from an economic rebound is warranted in 2021.