06 June 2021
What this chart shows
The chart shows the difference between US small cap value and US large cap growth equity returns on a rolling six-month basis with monthly intervals from 1994 to the present day. When the line is above zero, this indicates that small-cap value outperformed large-cap growth over the preceding six months. Around the peak of the Dotcom bubble in the late 1990s, large cap growth outperformed small cap value by a staggering 40%.
In the aftermath of the bubble, small cap value then proceeded to outperform by nearly 40%. Interestingly, a similar pattern emerged during the covid crisis, though the numbers were even more extreme. As the coronavirus pandemic hit, large cap growth outperformed by 45% in the six months to August 2020, as big tech names such as the so-called FAANGs thrived as the world entered lockdown restrictions. However, there has since been a huge rotation, and in the six months to March 2021, small-cap value outperformed by over 40%.
Why this chart is relevant
Value stocks have bounced back since the reflation trade began following the vaccine developments in November last year. Optimism for a strong economic recovery as lockdown restrictions ease and pent up demand is released has buoyed those more economically sensitive stocks. Furthermore, higher bond yields, as we have witnessed this year, have a greater negative impact on growth stocks as the interest rate used to discount their future earnings increases, meaning the present value of those earnings (the share price) decreases.
Two key points are important here. First, market and style rotations can be extreme and abrupt. Staying diversified reduces the chances of missing out on these moves. The second refers to where we go from here. Valuation dispersions between value and growth stocks still have some way before normalising. Should the reflation trade continue, value stocks are well set to continue recovering their underperformance of growth stocks over the last few years.
Source: Bloomberg Finance L.P., Momentum Global Investment Management
Research Date: June 2021
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