Equity Strategy: Value vs Growth run has stalled this year; The next trade is likely to go outright UW Value

Speaker: Mislav Matejka, Head of Global Equity Strategy

After a very strong factor differential last year, where MSCI US Value beat MSCI US Growth by as much as 30%, and by 25% in Europe, our call entering 2023 was that Value over Growth spread will be much lower this year. This is partly driven by our view from October that inflation has peaked, and that bond yields in the US are set to stall/move lower, in particular in 2H of this year. The relative Value vs Growth factor performance is sensitive to bond yields movement. Further, we see the risk of a rollover in activity momentum into mid year. Eurozone CESI has moved from -100 last summer to +100 last month, and is likely peaking out again. Even if activity does not show a clear slowing, the setup for Value style might not be all that great going forward. In the case that activity stays resilient, and inflation consequently proves sticky, central banks are then unlikely to go on a pause/pivot, and could keep hiking. This would mean that yield curve stays inverted, and perhaps gets even more extreme. Value factor needs steepening yield curve to work. Our core view is that in 2H market will be moving back to the recession trade, but even in the opposite scenario, Value might not be the best place to be. We have moved from OW Value vs Growth stance in 2022, to the Neutral stance at present, as we advised closing shorts on Tech in Q4. Probably the next move, in 1-2 months, will be to go outright UW Value vs Growth. Of note, Japan likely stands out as the odd one out, where the bond yields adjustment is more delayed, due to YCC. Longer term, value is still in Value style, so this should be seen as a tactical, 6-12 months call. Big picture, at the overall market level, we continue to believe that Q1 will mark the high point for the index levels this year, as the fundamental uplift does not come in Q2/Q3, post the relief in activity that is seen in Q1. This suggests that one should be turning more defensive as we move to quarter end.

This podcast was recorded on 26 February 2023.

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