Will US inflation revive value stocks? Conglomerates are finally dying Will US inflation revive value stocks? Conglomerates are finally dying Will US inflation revive value stocks? Conglomerates are finally dying

Will US inflation revive value stocks? Conglomerates are finally dying

Equities 7 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  If the worsening inflation outlook finally pulls the US 10-year yield to 2% then value stocks are likely in for a period of outperformance against growth stocks. GE's decision to break up its conglomerate of businesses is right one despite investors not seeming to put a big value on it. The times have changed and investors today want pure exposure to industries and technologies.

Value stocks could enter a new tactical period of outperformance

The higher than expected US inflation in October hitting 6.2% y/y on the headline CPI was a bit of shock, but not to our team as we have been leaning away from the transition camp on inflation this year. Underinvestment in the physical world (energy and mining), supply constraints, huge demand in the developed world, rising rent prices, and wage pressures will continue to carry inflation at a higher level through 2022. This will put upward pressure on interest rates in the long end of the US yield curve. Investors in US Treasuries would just barely have preserved their capital in real terms since 2015 (see chart), but with the current nominal yields and outlook for inflation capital in real terms is going to be shredded at a rapid pace in 2022. The only meaningful response to preserve capital in real terms is for nominal yields to go higher.

The last time we had nominal yields on the rise was from early November 2020 to April 2021, it caused a rally in global value stocks outperforming global growth stocks by 18% before giving up most of the gains as growth stocks resumed their rally. If we are right on inflation and the response in yields, then energy, financials, and mining companies will drive the outperformance in value stocks. From a tactical point of view it is worth playing. Long-term our view is still that investors should have exposure to the commodity sector, cyber security, semiconductors, India, logistics, and mega caps.

Source: Bloomberg

Could the anti-conglomerate thinking come to technology?

The move by General Electric to break up the conglomerate into three separate companies follows a successful divestment strategy of Siemens, although we would argue that Siemens could be simplified even more. The two most iconic industrial conglomerates have finally caught up by the times and especially the evolution of investment theory on portfolio management. Nowadays, investors want pure plays on industries and technologies, just look at how Tesla is being rewarded by investors for being the only meaningful pure play on the future of electric vehicles. In the short-term it does not look like investors are impressed about the GE plan in which the debt split is one of the key outstanding issues. However, longer term it is the right decision and more companies should look hard at their businesses and consider whether there are any synergies between. If not, simplify the business.

The bigger question is whether the push to divest businesses that have no obvious synergies will come to technology companies as well. They have long been shielded from these pressures as they have most concentrated on the old industrials that embraced the conglomerate philosophy in the 1960s. Amazon is an interesting case where the synergy between the cloud business (AWS) and the e-commerce business is quite low. In 2020, the AWS business generated $13.5bn in operating income compared to $9.4bn for the combined e-commerce business. The cloud business comes with much higher operating margin and less CAPEX needed to drive incremental revenue, so investor demand would be extremely high for a pure play on the world’s largest cloud business. Maybe GE will be an inspiration for Amazon?

Source: Saxo Group

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.