Another false dawn for value stocks?

Value stocks have outperformed growth stocks over the past month, raising the prospect of a changing of the guard in terms of market leadership between the two investing styles. Growth has been dominant up to now and a broader participation of stocks in the recovery would be welcome, but over the past decade, previous periods of value outperformance have been short-lived. Will this time be different?

Value stocks tend to outperform during a recovery. But with a rebound in global GDP growth still shrouded in doubt, it’s difficult to call a major rotation in investing styles just yet. Despite the latest moves favouring value we think investors are likely to be better placed focusing on sector allocation rather than investing styles.

 
 

For example, the technology sector has led the way so far this year and we think this can continue. Many companies and businesses are being forced to explore new ways to conduct their businesses online, ranging from remote working, video conferencing to online shopping and payments. Much of this heightened demand is here to stay.

Health care has been another leading sector, particularly pharmaceutical and biotech companies that have worked on Covid-19 vaccines. However, the future performance may not be so broad once the pandemic is over. Telehealth providers could benefit from the increasing trend of remote consultations as more physicians and patients become accustomed to virtual care visits, while sales of healthcare equipment and services could take longer to recover due to delays to elective procedures and vastly reduced treatment capacity.  

Within value sectors, energy has rallied after a new agreement on oil production cuts among the OPEC+ nations and the rebound of economic activity in some countries. There could be further upside to oil prices as the demand picture improves and global oil inventories gradually normalize. 
 
In contrast, banks still face major headwinds. Net interest margins have declined, dividends have been cut and there is the potential rise in non-performing loans to come. In this environment, bonds appear to be a much more appealing part of the bank capital structure.