There has been a major regime shift across global asset markets year to date with sectors which are already well-allocated to (the US, tech, growth, ESG) underperforming. The laggards of the last decade (value, financials and commodities), have become the new leaders.
This can be seen in the performance of the major indices – the value orientated markets have performed the best with the UK currently in first place. The US, and within that, the Nasdaq, have materially underperformed. The chart below shows this clearly.
Regional performance YTD – Value countries up, Growth countries down
Regions with higher value composition are highlighted in green and regions with higher growth composition are in red.
Source: Lipper as at 18th February 2022
There were three main catalysts for this rotation:
Clear evidence that inflation is not transitory
The resultant change in messaging from the Fed (QE being withdrawn earlier / rate rises sooner)
Further signs that Omicron could be the beginning of the end of the pandemic
All of which have led to a major shift in the bond market, with yields rising materially. A seminal point was reached two weeks ago, when the US 10-year bond broke through 2% (before settling slightly lower as the focus moved to the Ukraine situation) - a c. 50bp rise year-to-date and back, broadly, where it was pre-Covid. It is this rise in bond yields which has caused the dramatic mix change in global equity markets.
Bond yields are likely to continue their ascent given mounting evidence of inflationary pressures, which we are seeing in most companies’ results and in our engagement with our portfolio companies’ management teams. Examples in the last month include the BT broadband price rise of close to 10%, brick prices up close to 20% and most of our holdings indicating wage inflation will be around 5% in 2022. A rise in US bond yields to 2.25% will lead to a further move in the performance of value vs growth and the UK versus the World.
The valuation gap (growth to value, UK to the world) entered 2022 at its widest ever (this is covered in the Outlook section of our last monthly report). The move year to date can hardly be seen on the graph shown below, which shows the performance of value vs growth.
We believe we are still at the foothills of a much larger move. Common sense checks also highlight the valuation gap remains large – does it feel right that the market capitalisation of Apple is within 5% of the entire market cap of the FTSE 100, does it feel right that the fall in the market capitalisation of Meta (the owner of Facebook) on the day it had its profits warning earlier this month, equated to a fall of 7% in the FTSE 100 (or the value of the entire mining sector)? Meanwhile in the value part of the UK market, which is where our Fund is positioned, valuations remain in our view, ludicrous. The majority of our holdings have clear 50%+ upside to very prudent target prices and are performing well.
Source: MSCI, Datastream, Barclays Research.
Learn more about our UK equity excellence here.
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