Value trap once again?
It should have been the big rotation when rates were rising following the Covid-19 vaccine, but as we said repeatedly on our podcast it could become a false breakout and so far our hesitance against value stocks has been right. Value stocks are right highly correlated to interest rates and thus value stocks are a play on economic growth and potentially higher inflation. It is not a bad trade for 2021, maybe second half, but investors must be patient. It is not certain that value stocks will outperform growth stocks by a lot just because rates go up. Growth stocks are still compounding earnings at a much higher level and thus even with modestly higher rates they could continue to outperform value stocks. We will not tactically be positive on value stocks until the 10-year yield is above 1%.
We are positive on equities in 2021
On a higher macro level, earnings expectations for next year are slowly coming higher and we remain constructive that equities will deliver a strong positive return in 2021. With the free cash flow yield at 5.9% in the MSCI World Index equities are attractively valued against bonds. The main risk to an equity rally next year is an economic slowdown, but we put that risk at a low probability as we believe governments and central banks will continue to provide stimulus, and especially China will ease financial conditions in the new year in a response to what seems to be too tight financial conditions which means that emerging market equities will likely do quite well 2021.