Toru Hanai/REUTERSSummary List Placement
One of the big themes in the stock market that has emerged in 2020 has been the huge bifurcation in the performance of growth shares and classically defined value shares.
This was particularly in the last month, after a number of trial vaccines have come closer to becoming viable candidates to ward off COVID-19.
But this outperformance of growth stocks over value stocks isn't new. Over the last 10 years, the MSCI Growth Index has risen by 179.37% in price while the Value Index has risen by 42.36%. The gap in relative return between the two now stands at around 67.95%.
However, in the last month there has been a rotation into value caused by prospects of an economic recovery in 2021, on hopes that there will be a successful rollout of several coronavirus vaccines which should stimulate the global economy - something that usually benefits value companies.
"In 2020, it got supercharged, and we've seen the valuation spread between growth and value has ballooned as a result of this dynamic," Ilan Chaitowiz said. Chaitowiz is co-manager of Nomura's $50 million Global High Conviction Fund and part of a team that manages $4 billion in assets.
"Value stocks" include a vast range of companies - anything from heavy industrial firms that make earth-moving equipment, to banks, or consumer discretionary firms that provide anything from high-end clothing, to cars, home appliances or entertainment.
Simply put, it encompasses all the kinds of stocks that have been badly beaten down this year by the pandemic, but that will likely bloom once the economy returns to some kind of normality, along with a successful vaccination effort and plenty of fiscal and monetary support from central banks and governments.
"The outlook for the world has totally reversed in the space of a month," Chaitowitz said. For him, the vaccine catalyst will simply result "in a far faster and more aggressive snapback in people's spending behavior than is anticipated from where we sit today... In six months time, we will see an unleashing of pent up demand from businesses and consumers to get on with their lives, which will be supported by government efforts to facilitate that - it's in everybody's interest that this happens," he said.
In essence, you should have moved to value "yesterday," Chaitowitz said.
"Trying to time the shift from growth... is like playing chicken with a steam train - you know it's coming. The risk is that even if you look like a hero doing it… it's a really stupid thing to be doing," he said.
Growth stocks are those that are less correlated with the health of the underlying economy. These companies provide goods or services that consumers need every day - anything from food and drink, to pharmaceuticals, to utilities. These now also include the big "work from home" stocks, such as video conferencing and message software, cloud computing, online shopping and even app-based food delivery services.
These are unlikely to take the kind of beating the value sector has, but their days of 2020-style explosive gains may be in the past, Chaitowitz said.
"The backdrop is a stellar performance of growth businesses [in 2020], many of them are likely to be overowned - if not overvalued - heading into an environment with an explosive economic rebound where value stocks are unloved, under-owned and deeply discounted," he said.
Aside from the fundamental economic backdrop that supports the shift into value, there is a market-based indicator that suggests this trade is long overdue.
The difference between 2-year and 10-year Treasury yields, which has been steadily marching higher since last year, has widened sharply over the course of the last six months, as investors see a greater chance of growth improving, inflation picking up and a smaller chance of looser monetary policy coming into effect.
When this widening, or steepening, of the Treasury curve takes place, value stocks tend to outperform their growth-focused counterparts. While the MSCI Value index has risen more quickly in the last month than the Growth index, the relationship with the Treasury curve is a lot weaker than it has been in the past.
If the typical relationship is seen as correct this means one of two things, Chaitowitz said. Either the Treasury curve needs to flatten and the gap between 2- and 10-year yields needs to shrink, or value stocks have a lot of catching up to do and, therefore, have more room to rally.
"Essentially growth might have had it too good this year. It's reasonable to expect value to recover a decent amount of loss ground heading into next year," Chaitowitz concluded.
These are the four stocks that he believes are ideally placed to benefit from the catch-up rally in value shares:Ross StoresMarkets Insider
- Ticker: NASDAQ: ROST
- Sector: Retail
- Market Cap: $40.51 bln
"Ross Stores is bricks and mortar retail, so you've got a pandemic which has accelerated shift online purchasing, and kept people who for good reasons away from, from shops. But, that's as bad as it gets for Ross Stores," Chaitowitz said.
Heading into 2021 Ross Stores is set to benefit from the consumer discretionary rebound effect with the revived economy. But, additionally, you have "a financially strong business... which has been able to maintain its operations... and actually most recently beat top-line expectations," he said.
"Its Q3 results were on the top line with 10% ahead of consensus expectations. To me, that's amazing, it's kind of insane that a close retailer in the depths of the worst pandemic we've seen in generations is massively outperforming," he added.
Secondly, lots of other clothes shops are shutting down, meaning Ross Stores will "pick up market share," he said, and coming out of the crisis, "lots of middle-low income people, which are Ross Stores main clientele... people who've been hit economically and need new clothes are going to be even more incentivized to go to a discount retailer then than they would have in normal time," he added.
"That's a triple whammy in rebound of consumer discretionary spending, market share gains where the competitive environment has been weakened and a much bigger addressable consumer market because people are worse off than they were before, and they're going to be attracted to this value statement," he concluded.
- Ticker: BME: ITX
- Sector: Retail
- Market Cap: €44.10 bln
Inditex are the owners of the Zara brand owner with shops in most of the central locations across Europe.
"We have built up a pretty big position over the summer because people were running away from bricks and mortar retail for the obvious reasons. Strength of their brand, so Zara is not a brand that isn't going to just shut down - it's strong business," he said.
"But, also actually they're relatively late development of their online offering which we think is underappreciated in the context of a global pandemic, but also is going to be a real tailwind to its growth going forward," he added.
Network InternationalMarkets Insider
- Ticker: LON: NETW
- Sector: Payments
- Market Cap: £47.19 bln
Network International is a UK-listed payment processor business with its operations based mainly in the UAE.
The company has been hit by two things:
"Firstly, they did an expensive looking acquisition over the summer and that spooked some people," he said. Secondly, UAE is "massively reliant on tourism and business travel" putting it in the crosshairs of a collapse in hospitality and business travel. So as demand for these international payments has declined, Network International has been "a real COVID loser," he said.
However, that dynamic should "reverse into 2021," he said.
Dubai, is going to be hosting a "massive expo conference," with initial expectations pre-Covid of 25m visitors, vs Dubai's population of 3m, he said. "Experts I've spoken to the industry were thinking that this could boost UAE GDP by 10-15%," he added.
The event has been delayed to October '21 – March '22 and should offer a good opportunity for Network International, he said.
Lears CorpMarkets Insider
- Ticker: NYSE: LEA
- Sector: Manufactoring
- Market Cap: $9.52 bln
Lear Corp manufacturer car interiors, but with a lot of focus on Tesla - which Lear does not supply to - this has been a weight on the stock, he said. However, Chaitowitz argues that the market is missing "the fact that every other single car manufacturer is plowing billions into developing their own EV offering to which Lear is a key supply into a very consolidated market - car interiors," he added.
As indicated by Boris Johnson's bringing forward of the banning of fossil fuel vehicle sales to 2030, the regulatory changes to greener solutions are fast approaching, and "Lear is going to be a key beneficiary of what we think is going to be a prolonged conversion cycle into more fuel efficient or less polluting vehicles," he concluded.
- Goldman Sachs says buy these 16 pandemic laggards set to rebound in 2021 — including one that shoots 159% above consensus EPS estimates
- Deutsche Bank says you should own these 14 stocks set to be post-pandemic winners — including one that could rally by 67%
- Buy these 28 discounted stocks from an LGBT-inclusive index that's crushed its global benchmark since 2010, says Credit Suisse