Growth companies, led by the technology sector, have outperformed value plays for over a decade, and any attempts by investors to rotate away from the tried-and-true and into stocks that are tied more closely to the U.S. economic cycle have been short-lived.
But the next few months are likely to see shifts in policy
and the economy that support a “quite large,” if temporary, rotation, said
Goldman Sachs strategists in a recent analysis.
Why temporary? The reasons companies that are growing revenues or earnings faster than average have been king ever since the end of the 2008 financial crisis are still in place, the Goldman team acknowledges. Most of the world has been entrenched in a low-growth, low-inflation, low-interest-rate environment. “The scarcity of growth means that investors are prepared to pay a big premium for stable secure growth in the few areas that offer it,” the analysts write.
But in an environment of improving economic growth and rising bond yields , both of which Goldman expects in the near term, cyclical stocks have traditionally outperformed defensive plays, by as much as 15%. In the years since the financial crisis, there have been 15 such periods, lasting on average four months. “Value stocks also outperform during these shifts – albeit by less,” they write.
It’s worth noting that calling the start to the next value rotation can feel a bit like waiting for Godot. There were several moments in 2019, when central banks around the world were easing monetary policy, that looked promising, and there have been several since the coronavirus crisis of the spring. None have lasted.
What may make this time different, the Goldman analysts argue, is the actions by governments in the wake of the coronavirus pandemic. After the 2008 financial crisis, massive amounts of central bank easing were offset by fiscal policy tightening, and in many cases austerity measures.
But now, at least in the U.S., with a Democrat looking likely to win the White House, and possibly also gain control of Congress, fiscal spending will ramp up further. In the wake of this “Blue Wave” Goldman projects a another fiscal package, costing around $2.2 trillion, will be signed into law. America has already injected more fiscal stimulus than Europe, including spending worth 12% of GDP to combat the recession resulting from the coronavirus pandemic. That could lead to a big bond sell-off, pushing Treasury yields
up 30-40 basis points, they reckon.
The Goldman team also expects organic economic growth will boost interest rates and yields. “A medical solution should accelerate the path to economic normalization, which we believe would lift the earnings and prices of the most cyclical slices of the market,” they write. “This potential improvement in economic growth should boost inflation and increase longer-term rates.”
They are expecting “large shares of the US and European populations will be vaccinated by the end of Q2-2021 and Q3-2021, respectively,” and project that a vaccine will boost economic growth in the U.S. by 3% and Europe by 2%.
That kind of growth is largely priced into equities markets, Goldman writes. What’s not yet accounted for is which sectors stand to benefit.
“If the market is really pricing an early vaccine and a
quick recovery, then we believe it is pricing it in the wrong slices of the
market. Indeed, with an early vaccine, we would expect some reversal of the
trades that worked well during the coronacrisis, but the companies that have
done well year-to-date are still holding up well relative to the market.”
Sector recommendations that emerge from this thesis can be found in the table below.
|Autos & parts||Chemicals||Food, beverage & tobacco|
|Banks||Financial services||Personal care, drug & grocery stores|
Industrial goods & services
|Construction & materials||Insurance||Telecoms|
|Consumer products & services||Media||Regulated utilities|
|Civil aerospace||Travel & leisure|
|Source: Goldman Sachs Global Investment Research|
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