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

7 minutes to read
Peter Garnry

Chief Investment Strategist

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

Latest Market Insights

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

The Saxo Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.