Whitechurch Investment Update: The Growth to Value Rotation

10th May 2021

In a year like no other, one could argue that 2020’s parting shot took aim at growth investors. Towards the end of November, we began to see the long-anticipated rotation away from large-cap and growth areas of the market in favour of both their smaller-cap and lowly-valued counterparts. It is no secret that the latter – which traditionally includes the likes of financial, retail, energy and industrial sectors, have been out of favour for some time. Recent history suggests that value stocks have outperformed their growth peers in just 3 of the last 10 years – last doing so in 2016. We must look further back for times when the practise of buying unloved and undervalued companies yielded great success. So why is this happening now? Firstly, for a rotation to occur, one area of the market, whether that be based on region, asset class, market capitalisation or style, will need to be viewed by investors as overvalued, with an alternative counterpart conversely undervalued. In this case, those companies characterised by low price-to-book or price-to-earnings multiples are being looked on favourably as the main beneficiaries of the improving global economic outlook. Similarly, it is small and mid-cap companies that are also being viewed as having both the least to lose and the most to gain.

Whilst it may be true that these areas of the market will experience the greatest uplift in pricing power as the economic recovery takes hold, we should also consider the recent underperformance of growth markets. Fears of overstretched valuations, particularly of the technology stocks that performed so well during the majority of 2020, have experienced a significant sell-off in recent months. Growth stocks are also traditionally more dependent on longer-term cash flows – a potential casualty of the higher interest rate environment invoked by recovery-fuelled inflation levels. As investors look to benefit from the changes in market sentiment, a deal of success so far has been found on our own shores. Global asset allocators are taking advantage of both the UK’s cyclical market sector composition and increasingly healthier manufacturing and services data. Further buoyed by December’s trade deal with the EU, a so-far successful coronavirus vaccination programme and the pent-up demand for consumer spending, the UK has been the best performing of all major regions for sterling investors over the first quarter of 2021.
Whitechurch Securities investment strategies are well-positioned to take advantage, and we feel that improving corporate earnings and the restoration of dividend payments anticipated during the rest of the year also bolsters the case for UK equities.


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