While three successive vaccine announcements triggered a sharp rise in unloved ‘value’ stocks, this quickly gave way to a sideways movement, not quite reversing the decade of value under- performance. However, we think the upcoming reflationary cycle increases the potential for cyclical value names to outperform growth stocks, and we have rebalanced our portfolios to reflect this.
We have been overweight quality stocks in the tech, consumer discretionary and communication services sectors for the past three years. While we want to maintain exposure to these stocks, which will continue to fare well under any economic circumstances – and provide exposure to the long-term digitisation trend – it is now time to increase exposure to cyclical value stocks to capture the upside potential in this section of the market.
As a first step, we have bought a global value ETF, avoiding any geographical bets and neutralising our sector allocation. Picking the right product to increase the cyclicality of portfolios is not easy and this ETF will allow us to benefit from the upside potential in lagging cyclical sectors, such as telecommunications, industrials, financials and some energy, while avoiding too much exposure to fossil fuels and to certain more problematic materials stocks.
Similarly, it is important to exercise caution around financials. While a steepening yield curve should broadly benefit banking stocks, the underlying dynamic for European banks differs vastly from that of US banks and we are mindful of structural headwinds and idiosyncratic issues in the sector.
If we see further confirmation of our expected scenario, we may fine tune our allocation in favour of sectors or stocks benefiting from the rotation. It is important to keep an open mind with regards to how the reflation will develop, and if we see certain value positions overshoot, we will envisage reducing our quality positions.