The chart below displays the performance of Value versus Growth equities, set against the US 10 year Treasury yield. Value stocks are those which trade at a discount valuation to the market whereas growth stocks are those which offer superior growth in profits. There is a clear correlation between the relative performance of value-to-growth and the 10 year yield, so it is worthwhile understanding why this is the case, and what we might expect going forward.
Source: Factset
Both interest rates and the Value style tend to rise when the underlying economy displays signs of strength; stronger economic growth will lift earnings expectations of Value stocks proportionately more than Growth stocks, while interest rates tend to rise due to rising inflation (or inflation expectations) and a willingness of investors to hold “risk-on” securities (i.e. equities).
As can be seen from the chart, Value had a period of strong outperformance in the second half of 2016, and yields rose concurrently. This reflected the “Trump bump”; expectations of strong US economic growth, fuelled by a loose fiscal policy. For myriad reasons this has not been the case, and yields have been moving back towards their pre-US election levels.
If economic growth remains subdued and yields consequently lower, one would expect Growth stocks to outperform Value. Until a powerful catalyst for growth is unveiled (no longer expected to be North American fiscal policy) it is likely that Growth will continue to outperform Value.
By James Mee
RISK WARNING
The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.
Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is not guaranteed
The information relating to ‘yield’ is for indicative purposes only. You should note that yields on investments may fall or rise dependent on the performance of the underlying investment and more specifically the performance of the financial markets. As such, no warranty can be given that the expressed yields will consistently attain such levels over any given period.
