Page 8 - DIY Investor Magazine | Issue 29

THE GREAT ROTATION: WILL IT ENDURE?
- Equity markets have seen a significant rotation over the past six months
- There are still compelling reasons supporting the rotation, from economic recovery to relative valuations
- However, the rotation may change in flavour from here
The market mood has notably shifted since the announcement of successful vaccine trials in November. Investors have taken a renewed interest in a number of unloved sectors and, in particular, economically sensitive parts of the market have revived. What’s behind this change in sentiment and can it persist?
It has been a difficult few years for investors with a ‘value’ tilt to their portfolios. Low interest rates and quantitative easing measures have pushed bond yields lower, which has, in turn, favoured higher growth areas such as consumer staples and technology.
These conditions have been in place since the financial crisis of 2008-09, but the response of central banks and investors to the pandemic pushed the relative valuations of growth and value to extremes.
However, this abruptly changed towards the end of 2020. Thomas Moore, manager of the Aberdeen Standard Equity Income Trust, says: ‘A series of macro events happened that drove a reversal in bond markets and with that, we’ve seen the most enormous sector rotation.’
He sees four key elements driving the shift – a surge in economic data; improving earnings in many value sectors; extreme positioning in growth sectors such as consumer staples or technology; and finally ‘events’, such as the vaccine rollout, which are helping drive recovery.
This is a global phenomenon and if anything, the value versus growth gap has been more extreme in the US. For Fran Radano, manager of The North American Income Trust, the
recent rally goes some way to resolving a long-held anomaly: ‘Investors will always pay a little more for companies that are growing above trend. That’s natural.
What has been unnatural over the last couple of years has been the bifurcation – paying 40-50x earnings for companies that are growing, perhaps, 20% and 15% next year.’
‘THESE STOCKS HAVE DURATION, PREDICTABILITY OF EARNINGS AND COMPELLING VALUATIONS’
Radano believes investors have started to reappraise the fundamentals for individual companies.
For Moore, global recovery should mean the rotation can endure, particularly in the UK where the economy is bouncing back strongly. He believes that the rotation is far more than a six-or-twelve-month phenomenon. Value areas have been out of favour for many years and the recent recovery is still in its infancy.
Equally, valuations still favour economically-sensitive areas. Martin Connaghan, manager on the Murray International Trust, says even after the recent rotation, there are plenty of areas that look too expensive:
‘Any IPO that mentions payments or ecommerce, or investment trusts involved in a data centre seem to be heavily oversubscribed. The same is true for areas such as data towers or infrastructure companies.
We always look at whether investing in this stock helps us meet the investment objective and if so, are we comfortable with paying this multiple.’
‘WE’VE SEEN THE MOST ENORMOUS SECTOR ROTATION’
DIY Investor Magazine | Jun 2021 8