John Surplice, Head of European Equities, Invesco, comments on the great rotations from ‘Growth’ sectors towards ‘Value.’
On November 9th Pfizer and BioNTech announced that they had created an effective vaccine for COVID-19. This news drove a sharp rotation away from the so called ‘Growth’ and ‘Quality’ sectors and into ‘Value’ ones. In fact, it was one of the biggest rotations we had ever witnessed.
Ever since then investors appear to be grappling with the idea of whether or not this will be sustained or short-lived rotation. Four months have passed since the announcement and at the time of writing, ‘Value’ as a factor has indeed outperformed ‘Growth’ and ‘Quality’ – though not in a straight line. It can be best described as a tug of war.
For us, as valuation focussed investors, factors in reality do not matter that much. Yes, our European equity fund range continues to be tilted towards the ‘Value’ factor, but this is simply because that is where we are finding the most attractively priced stocks based on our fundamental analysis.
So, back to the big question: can the rotation continue? We think so, and here’s why:
Synchronised global economic recovery
Ever since the Global Financial Crisis (GFC), global economic growth has been sluggish. Europe, burdened by fiscal austerity and the sovereign debt crisis, has been a notable drag in particular. However, as vaccines are rolled out and economies gradually re-open, we expect global economic activity to recover rapidly.
Austerity ended abruptly last year as European policymakers and governments were forced to provide massive amounts of fiscal support in response to the pandemic, e.g. €750bn Recovery Fund (c. 5.4% of EU GDP). Far from being transitory we expect fiscal stimulus to stay for some time to come. This is as much the case for Europe as it is elsewhere. The change in policy mix should allow Europe to grow above trend and hence be additive to global growth on a multi-year basis.
The last time we had a prolonged period of global growth – between 2003 and 2007 – not only did European equities outperform global and US equities, but European ‘Value’ fared even better.
Source: Refinitiv, 31 Dec 2020