John Bennett Director of European Equities | Portfolio Manager
John Bennett, Director of European Equities, explains why he believes value stocks could dominate the ongoing tug-of-war with growth stocks in 2022 and discusses why it is important for investors to stay the course.
European equities will continue to be influenced by the ongoing debate around inflation and the closely associated shape of the bond yield curve.
After a long period of outperformance of growth stocks, we are starting to see signs that value stocks could dominate market returns in 2022.
Equity investors should be prepared for 10-20% drawdowns in their investments as we believe that this is part and parcel of investing in equities.
What themes will influence European equities in 2022?
I think European equities, probably like American equities, will continue to be influenced by the same old debate and factors which basically is inflation – transitory or not? And the associated, very closely associated shape of the bond yield curve. So, are bond yields going to back up or are they not? If they do, value stocks [are] likely to have a better time, if they don’t then growth stocks are likely to have a better time.
That being said, in Europe in 2021 I think something of the tone has been set in that it hasn’t been a ‘slam dunk’ as it had been in previous years by growth stocks over value stocks. I think there has been a real tug-of-war, a really interesting tug-of-war in 2021 in Europe between growth and value. In fact, at the top of the league table of performing sectors in 2021 stand technology and banks – a) the poster child for growth, and b) the poster child for value. And so, I think we are actually at a really fascinating juncture in markets right now.
Where do you expect to find the most compelling opportunities?
There is no doubt that within the team we’ve been talking a lot about this. We have been itching all year in 2021 to buy more value. We came out of the summer in 2021 and tilted a little bit more to value, so a little bit more autos, a bit more oil and even a bit more banks. Not huge – it is a [little] bit and it’s a [little] bit and it’s a [little] bit. Because the conviction isn’t there yet to tilt more aggressively to value because the conviction isn’t there yet in the shape of the yield curve. This is crucial. The shape of the yield curve is crucial to that whole shape of value versus growth.
So, throughout 2021 we have been saying “itching to buy more value, itching to buy more value”. Straws in the wind of potentially a stealth bull market in value might just be appearing at long last. I see that’s where the opportunity is in 2022 – value.
What key message should European equity investors be aware of?
I think the single, and permanent, i.e. forever, takeaway for any investor in equities in any part of the world, not just Europe, is if you can’t take a 20% drawdown, stay away. Because that’s what equities do. 10% in any given year is normal and 20% happens too. I’m always amazed by how spooked people get on a 10% drawdown in equities. It is part of the terms of engagement. This is what happens. Stay the course, just stay the course. And if I’m right that European value could be very interesting in 2022 – and I mean interesting on the upside, I think there will be some stuff that is interesting on the downside – then stay the course.
Bond yield – the level of income on a security, typically expressed as a percentage rate. Lower bond yields mean higher prices and vice versa. The bond yield curve is a line that plots yields (interest rates) of similar bonds across different maturity dates.
A ‘normal’ bond yield curve starts with low yields for shorter-maturity bonds, to represent a lower risk of default, and then increases for bonds with a longer maturity. A steepening line, from short-maturity bonds to long maturity, is commonly seen as an indicator of economic expansion (and possibly expectations of higher inflation). When the yield curve steepens, banks are able to borrow at lower interest rates in the short term, and lend at higher interest rates, creating potential profits. With banks more willing to lend to generate these revenues, this can mean that value companies have better access to capital, which may help them to outperform growth companies. When the yield curve flattens, which is commonly seen as an indicator of economic uncertainty, there is little difference in yield to maturity among shorter and longer-term bonds. In this environment, banks prefer to lend to growth companies, which may help them to outperform value.
Bull market – a market in which prices are rising for a sustained period.
Drawdown – a decline in the value of an investment or fund from a relative peak value to a relative trough during a specified period.
Growth stocks – shares of a company which generally show above-average earnings and that are expected to grow at a rate significantly above the average growth for the market.
Inflation – the rate at which the prices of goods and services rise in an economy. Transitory inflation is a temporary increase in prices across the board which is followed by prices returning to pre-inflation levels.
Value stocks – shares of a company that appear to trade at a lower price relative to the company’s fundamentals, such as dividends, earnings or sales.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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