Summary List Placement
Value stocks are set to outperform in 2021, as global economic activity recovers and inflation expectations pick up, continuing the historic rotation away from growth stocks that started in the fourth quarter of 2020.
Even with at least three new confirmed coronavirus variants threatening the reopening of economies and major Western countries like the UK still under some of the strictest measures, Goldman Sachs remains bullish on the outlook for 2021.
Indeed, the bank forecasts a 6.5% rise in global GDP growth by the end of the year, according to a research note published Monday with authors including Peter Oppenheimer, chief global equity strategist and head of macro research in Europe.
Value and cyclical stocks stand to benefit from this economic renewal, as these companies’ performances are often closely correlated to the health of the economy. For example, value stocks saw a strong rally in the final few months of 2020 on positive vaccine news, as investors saw a quicker-than-expected opportunity for large portions of the economy to reopen – many of which were heavily dominated by value stocks, such as airlines.
In the fourth quarter of 2020, when the first COVID-19 vaccine candidates emerged, the MSCI Global Value index, a basket of cyclical stocks, gained 15.2% in the fourth quarter, compared to the 12.4% gains in the corresponding growth index.
It doesn’t end there. Goldman Sachs argues cyclical stocks still have further to run, as the recovery moves from the “hope” to the “growth” driven phase of the cycle, the note said.
This should aid earnings-per-share growth, which should become the main driver of returns, the note added, forecasting 40% EPS growth in 2021 and 12% in 2022.
Goldman Sachs highlight these 10 reasons for why the rotation to value is set to continue:
Faster vaccine distribution and better treatment
Stronger global GDP growth
Restored consumption, given high consumer-savings ratios
Supportive financial conditions (QE, rates at the zero bound or below)
Supportive fiscal policies (coronavirus packages, EU Green Deal, US ‘Blue wave’)
Improving inflation but no hike before 2025 in Europe and 2024 in the US
Steepening yield curves
Higher commodities prices
Positive earnings revisions
Extreme discount of value vs. growth stocks
The main contributors to the reversal will be a rise in inflation and growth expectations, the note added.
Inflation means that the cost of goods and services is increasing, diminishing the purchasing power of cash, meaning money will be worth less in the near future. However, value stocks allow investors to recoup their cash in a shorter period of time, making them more attractive than growth stocks during inflationary periods.
Where should you be investing?
Value and cyclical valuations look comparatively cheap, even after the rally, offering a good opportunity for returns. Goldman Sachs is overweight banks, oil, basic resources in Europe, offering “good cyclical upside and high yields,” the note said, adding that the bank is overweight autos and parts, oil, construction and materials, consumer products and services and energy in the region.
Areas like renewables, health care and luxury goods will also yield “likely longer-term winners,” the note added.
Goldman Sachs is also recommending the DAX …read more
Source:: Business Insider