The big rotation into value
Value investors often say there is no point trying to time the rotation back to their value style because it can happen in the blink of an eye and you often end-up chasing the move and paying higher prices. The market action on 9 November and follow-through in the intervening period certainly lends some credence to that view.
Commenting on the sharp moves over the last week, Jefferies noted that, ‘if anybody was in any doubt that cyclical stocks would rally sharply on the re-opening trade, they got the evidence they needed with the parabolic moves on Monday’.
Leisure and hospitality shares have seen very big rallies with Cineworld (CINE), Hollywood Bowl (BOWL), Hostelworld (HSW) and The Gym Group (GYM) all rising between 40%-to-50%. Shares in SSP (SSPG) are up 76%. Banks and insurers are up around a quarter.
At the other end of the spectrum have been Ocado (OCDO), Games Workshop (GAW) and Keywords Studios (KWS:AIM), all off around 10% while companies focused on Covid-19 testing and therapeutics have seen the biggest falls. Avacta (AVCT:AIM), Synairgen (SNG:AIM) and Novacyt (NCYT:AIM) have all fallen by around a third.
It has been the same story on the funds and trust side with value focused funds such as Aurora (AVV) rallying 10% and Fidelity Special Values (FSV) up almost 15%. Funds with a heavy weighting in technology shares such as Scottish Mortgage Trust (SMT) have seen the price of their shares fall 5% over the last week.
No doubt some of the moves in cyclical names were related to short-sellers being caught out on the positive vaccine news and rushing to buy back their positions. Cineworld is one of the most heavily shorted names with around 9% of its shares held by investors betting that its shares would fall.
However there are an increasing number of market observers taking the view that co-ordinated fiscal and monetary support is setting up the conditions for a global synchronized recovery sometime in 2021. Morgan Stanley is in the strong recovery camp saying ‘our bull case assumes that the virus is contained quicker, allowing GDP to return to pre-Covid-19 levels by 3Q 21’.
They maintain that higher growth, rising inflation and higher bond yields suggest a ‘reflation narrative’ which favours financials, cyclicals and value over defensives, growth and quality.
Meanwhile even before the Pfizer and Moderna vaccine breakthrough news JP Morgan Cazenove said it believed markets were ‘primed for a style rotation back into value’ explaining the firm had taken profits on its long-standing bullish stance technology in favour of banks and insurers.