After the sharpest fall in GDP in 300 years, this year looks set to see a record bounce back. Growth forecasts for 2021 continue to be revised upwards, as the pace of the global economic recovery gathers momentum, and could be the strongest since 1980 or stronger.
In the US, the government enacted a $900bn plan in December, a $1.9 trillion stimulus plan in March and now the Democrats are pushing for a further $2.25 trillion dollar infrastructure spending plan.
GDP forecasts for the US in 2021 have increased from just under 4% to over 6%. To put this into context, this year the US looks set to grow faster than China for the first time since 1976.
Finding the value
As we mentioned in our article last month, the shift in growth is also having a profound effect on the leadership of equity markets. Over the last 15 years global growth has slowed and investors have sought returns from fast growing companies often operating in the cutting edge technologies of the time, called Growth investing. As growth has been scarce, many of these companies trade on eye watering valuations.
Value investing is the other side of the investment coin, focusing on businesses that trade at a discount to the market. This style of investing has been something of a PR problem: the companies tend not to be focused on glamourous sectors, but here’s the thing: value investing works.
According to Will Bartleet at Pacific Asset Management, “since 1926, investing $1 in growth stocks returned around $5,500 – not bad – but investing $1 in value stocks returned over $67,000, more than ten times as much. This is because investors tend to overestimate the growth potential of growth stocks and so overpay for them. On the other hand, investors tend to underestimate the potential rebound of both earnings and valuations of value stocks and so they get marked down to valuations that are lower than is warranted by their prospects.”
Today, value stocks have only been this cheap against growth stocks on a handful of occasions over the last fifty years and presents an opportunity to invest in companies that are significantly undervalued compared to the rest of the market.
There are of course risks; the most visible casualty of recent fiscal policy has been the bond market due to inflation concerns with the possibility of rising interest rates and the removal of stimulus. US treasuries recording their biggest losses since 1980.
There’s also the risk of an uneven recovery as parts of the developed and emerging world lag behind in their vaccination programmes and mutations of the virus continue to emerge.
However, this environment also presents opportunities – an ideal environment for multi-asset investing.
It starts here
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