Stock pickers reckon it’s time to move on from central banks

Naomi Rovnick

LONDON (Reuters) – Stock market investors are calling time on the idea that the Federal Reserve, and other major central banks, have their back.

Given the resilience of data and inflation sticky, there are no chances for interest rates to be cut by year’s end. Instead, central banks may decide that borrowing costs will remain at their current highs since 2007.

What is the takeaway for money managers? Switch from so-called growth stocks, such as tech, and focus on businesses that can withstand the end of cheap funding — banks that benefit from higher rates and resources and consumer staples businesses that can sell goods at prices that match inflation.

High dividend paying companies that invest in growth instead of paying high dividends are preferred.

“For years, we’ve had a capitalist world that was highly dependent on central-banking policy and the ‘Fed put’,” Gerry Fowler from UBS’ European Equity Strategy said that central banks support financial markets when economies are weaker.

“We are rapidly transitioning away from that.”

THE VALUE OF VALUE IS BACK

European banks stocks have seen a 24% increase in value this year. This is due to the higher dividend yields and low price ratios.

According to Morningstar data global equity income funds saw their first ever annual net inflows since 2014. This trend has been ongoing into 2023, Morningstar data shows.

Tech firms dominate the world’s equity markets. They rely on low-cost money to finance innovation. Shares of tech companies had a solid start to 2023, based on expectations that rate increases would slow down and end aggressively.

Still up about 12 percent year-to date, the Nasdaq and sub-indexes of European technology stocks are both growing by 15%. These rallies stalled in February due to strong U.S. employment and consumer data, and high inflation in the eurozone.

ALL CHANGES

Rate cuts are unlikely soon as U.S. policymakers place priority on the inflation fight, and U.S. money market prices U.S. rates at a higher level than 5%.

“We probably are not getting a (central bank) pivot,” said Janus Henderson portfolio manager Robert Schramm-Fuchs. Robert Schramm-Fuchs, Janus Henderson portfolio manager, stated that he had been buying shares of companies in mature sectors left behind by tech bubble. These include miners and industrial supplies.

“We’re going back to what investing used to be,” He said. “It is a good environment for stock-picking.”

Chief investment officer of Premier Miton UK Asset Manager Neil Birrell stated that his funds are adding to positions within energy companies and banks. These were the clear winners over the past six months.

This is a stark contrast to the past. As a result, the economy was protected from pandemic-related shut downs by slashing interest rates.

In 2020, the Nasdaq saw a 44% increase in its annual growth rate. This was its highest level since 2009.

NORMALITY BACK

An alternative to exuberant market conditions or risk-taking is scanning for low-value companies paying decent dividends.

A Reuters survey of 300 global asset manager found that 70% believed value stocks would perform better this year, according to a poll.

BlackRock Investment Institute (the research arm of the biggest global asset manager) is now tipping value shares.

Since early 2020, MSCI’s value indicator, which includes stocks with high price-to-book values and high dividend yields has outperformed its tech-dominated growth index.

These value indexes are dominated by companies in energy, which can be seen as profiting from China’s economic recovery. Banks that benefit from higher rates, health care and household product businesses and those that may pass on inflation to consumers could also dominate this value index.

Recently, data shows that in Europe profit margins of companies are increasing along with input costs.

Graphic: Value vs. growth stocks paid premium https://www.conservativenewsdaily.net/breaking-news/wp-content/uploads/2023/03/localimages/chart.png

“With the reopening of China and the stabilisation of the economy in Europe, that’s enough for these kinds of stocks to work,” Janus’ Schramm-Fuchs said.

Investors are shifting to value shares because they pay a lower premium for growth stocks.

In December 2020, the gap between MSCI’s price-earnings multiple and MSCI’s value index was at its largest in a decade. It was dominated by Apple, Microsoft and Microsoft. Although it has returned to its pre-pandemic level, it remains high compared with the Fed’s latest rate-rise cycle.

“This convergence (between growth and value) should continue to be your base case,” Ryan Reardon (ETF strategist, State Street Global Advisors), said the following: “Central banks will keep rates high.”

Reporting by Naomi Rovnick. Editing done by Dhara Ranasinghe & Ed Osmond