Value Rotation May Not Last Long, Warn Carillon and Invesco
An effective vaccine for Covid-19 could bring the global economy back to life, helping sectors that were battered by the pandemic and boosting cheap stocks. However, investors will need to be careful as these moves are overdone after this month’s trading action and can lead to “value traps,” according to Matt Orton, vice president at St. Petersburg, Florida-based asset manager Carillon Tower Advisers Inc.
“Technically and from investors’ enthusiasm standpoint, we look a little stretched in the short-term and there is still a lot of uncertainty from now until February or March of next year,” Orton said in an interview with Bloomberg. There’s potential for further lockdown measures as Covid-19 cases surge and there is still a run-off election in Georgia, both of which add to uncertainties in the short-term, he added.
In his view, energy and financial companies are the biggest value traps as both sectors are “structurally challenged.” Instead, for the short-term, “I would be positioning myself in favor of growth but lean toward cyclicality,” Orton said.
Examples include credit-card companies such as Visa Inc. and Mastercard Inc., which are a bet on the re-opening of the global economy. He also likes semiconductors and semi capital equipment companies.
Similarly, Invesco’s senior strategist Talley Leger believes the positive vaccine news may not be enough to propel the global economy toward a sustainable recovery, dampening the rotation into value stocks. “It could potentially shape up to be another head fake as we have seen so many of them recently,” he told Bloomberg in an interview.
The MSCI World Value index climbed about 13% since Oct. 30, while its growth counterpart rose about 9%. However, growth is still up 25% this year, while value is down 7.9%.
Leger thinks the only way there could have been a persistent rotation into value is if there were a unified U.S. government, which could have brought in a significant fiscal package. “So ultimately, I think, we will return to the old normal where tech and growth outperforms,” he added.
Orton still favors large-cap technology companies such as Microsoft Corp. and Amazon.com Inc., with their “long-term structural tailwinds” and not just work-from-home benefits.
For Leger, he is sticking with his recommendation of investing in risky assets for the longer-term, including cyclical and smaller-cap companies, with a preference for equities over bonds.
©2020 Bloomberg L.P.