Value stocks

“Growth managers will find it hard to ignore value stocks,” says Abrn’s Moore

Fund managers with a growth bias will find it increasingly difficult to ignore traditional value sectors, fund manager Aberdeen Standard Equity Income Fund said.

Thomas Moore said the macro headwinds the market is currently experiencing, such as inflation and rising interest rates, are very powerful drivers of market rotation.

Speaking to FTAdviser, he said: “What’s happened over the last five years or so is people have assumed it’s always going to be the same as it has been…[in that] stocks would continue to climb indefinitely.

“We are seeing in the first two or three weeks of January this violent rotation out of these sectors of the new economy.

“As an income investor, some of the companies [within] these traditional lines of business now generate such large cash flows that it is increasingly difficult for people with a penchant for growth to ignore them.

Those companies in traditional value sectors, which make up much of the FTSE, have already suffered writedowns and soaring dividend yields due to growth stock positivity, he said.

While that was happening, a number of these value companies were busy getting their houses in order and staying disciplined on capital, Moore said.

“As an example, Rio Tinto’s yields jumped as it paid down debt and avoided mergers and acquisitions.”

The reverse has happened for growing companies, he added, where rising debt has fueled ill-advised mergers and acquisitions.

“There is now the additional driver of economic recovery, creating another driver of improving returns for these companies – it is the icing on the cake, allowing many of these stocks to have the strongest momentum in market profits.

“The tide has turned – and that makes it very difficult for growth managers to ignore traditional value/revenue sectors.”

With inflation rising and central banks looking to tighten policy, some say the outlook for growth sectors does not look positive.

Paul Grainger, global head of multi-sector fixed income at Schroders, told FTAdviser yesterday that this could be extremely negative for junk bonds.

He said: “The outlook for riskier assets such as credit is less attractive than it was in 2021. This also aligns with our view that central banks are becoming more attentive to inflation risks. world and we have passed the growth peak for this cycle.

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