- 2020 has seen a huge spread between growth and value stocks, but with economic recovery on the cards for 2021, value stocks are well-placed to outperform.
- "Essentially growth might have had it too good this year. It's reasonable to expect value to recover a decent amount of lost ground heading into next year," Nomura fund manager Ilan Chaitowitz said.
- Here are four stock picks he thinks will play well in the rotation to value.
- Visit Business Insider's homepage for more stories .
One of the big themes in the stock market that has emerged in 2020 has been the huge bifurcation in the performance of growth shares and classically defined value shares.
This has been particularly evident since November, after a number of trial vaccines have come closer to becoming viable candidates to ward off COVID-19, with Moderna and Pfizer's starting to be rolled out throughout several countries.
But this outperformance of growth stocks over value stocks isn't new. Over the last 10 years, the MSCI Growth Index has risen by 179.37% in price while the Value Index has risen by 42.36%.
However, with the positive vaccine news there has been a rotation into value caused by prospects of an economic recovery in 2021, on hopes that there will be a successful rollout of several coronavirus vaccines which should stimulate the global economy - something that usually benefits value companies.
"In 2020, it got supercharged, and we've seen the valuation spread between growth and value has ballooned as a result of this dynamic," Ilan Chaitowiz said. Chaitowiz is co-manager of Nomura's $50 million Global High Conviction Fund and part of a team that manages $4 billion in assets.
"Value stocks" include a vast range of companies - anything from heavy industrial firms that make earth-moving equipment, to banks, or consumer discretionary firms that provide anything from high-end clothing, to cars, home appliances or entertainment.
Simply put, it encompasses all the kinds of stocks that have been badly beaten down this year by the pandemic, but that will likely bloom once the economy returns to some kind of normality, along with a successful vaccination effort and plenty of fiscal and monetary support from central banks and governments.
"The outlook for the world has totally reversed in the space of a month," Chaitowitz said. For him, the vaccine catalyst will simply result "in a far faster and more aggressive snapback in people's spending behavior than is anticipated from where we sit today... In six months time, we will see an unleashing of pent up demand from businesses and consumers to get on with their lives, which will be supported by government efforts to facilitate that - it's in everybody's interest that this happens," he said.
In essence, you should have moved to value "yesterday," Chaitowitz said figuratively.
"Trying to time the shift from growth... is like playing chicken with a steam train - you know it's coming. The risk is that even if you look like a hero doing it… it's a really stupid thing to be doing," he said.
Growth stocks are those that are less correlated with the health of the underlying economy. These companies provide goods or services that consumers need every day - anything from food and drink, to pharmaceuticals, to utilities. These now also include the big "work from home" stocks, such as video conferencing and message software, cloud computing, online shopping and even app-based food delivery services.
These are unlikely to take the kind of beating the value sector has, but their days of 2020-style explosive gains may be in the past, Chaitowitz said.
"The backdrop is a stellar performance of growth businesses [in 2020], many of them are likely to be overowned - if not overvalued - heading into an environment with an explosive economic rebound where value stocks are unloved, under-owned and deeply discounted," he said.
Aside from the fundamental economic backdrop that supports the shift into value, there is a market-based indicator that suggests this trade is long overdue.
The difference between 2-year and 10-year Treasury yields, which has been steadily marching higher since last year, has widened sharply over the course of the last six months, as investors see a greater chance of growth improving, inflation picking up and a smaller chance of looser monetary policy coming into effect.
When this widening, or steepening, of the Treasury curve takes place, value stocks tend to outperform their growth-focused counterparts. While the MSCI Value index has risen more quickly in the last month than the Growth index, the relationship with the Treasury curve is a lot weaker than it has been in the past.
If the typical relationship is seen as correct this means one of two things, Chaitowitz said. Either the Treasury curve needs to flatten and the gap between 2- and 10-year yields needs to shrink, or value stocks have a lot of catching up to do and, therefore, have more room to rally.
"Essentially growth might have had it too good this year. It's reasonable to expect value to recover a decent amount of loss ground heading into next year," Chaitowitz concluded.
These are the four stocks that he believes are ideally placed to benefit from the catch-up rally in value shares:
Via PakApNews