Over the past few months, we’ve heard plenty about the rotation to value putting pressure on growth stocks. Is it just beginning, is it fairly advanced, or is it someplace in between? Global recovery, should it continue, will generally help “value” or slower-growing established businesses, as it pushes long-term rates up and investors therefore put a higher value on cash and cash-generative businesses. COVID resurgence, on the other hand, threatens recovery, depresses long-term rates and supports the valuations of conceptual, particularly virtual businesses.
But what if global recovery does continue? It depends on inflation and its effects on bond yields and the yield curve. We have seen a spike in inflation largely because there is lack of supply alongside abundant stimulus and demand. Looking ahead, we believe inflation will settle down at a more normal level. Based on our analysis, the style rotation is fairly well advanced and I prefer to think of it less in terms of growth versus value, but in terms of conceptual stocks, which don't necessarily have earnings, versus companies that have more stable or more predictable cash flows. Some of those more conceptual stocks have lost value over the last few weeks, but I do see the pace of that decline slowing down and actually offering good opportunities to get into some of these businesses at a better price.
Robert Horrocks, PhD
CIO and Portfolio Manager
The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.