While value is expected to outperform growth in 2021, investors need to maintain a balanced approach between the two to mitigate the risk of incorrectly betting on one style, according to T Rowe Price.
Yoram Lustig, head of multi-asset solutions at the US investment company, says as the rollout of coronavirus vaccines paves the way for a post-pandemic recovery, global GDP growth in 2021 – buoyed by unprecedented fiscal and monetary stimulus – may potentially be the strongest recorded in decades.
As such, in an environment in which interest rates, inflation and bond yields are all rising, and commodity and energy prices are increasing, he said investors would be right to consider the opportunities in those areas of the market most neglected during the pandemic; namely small caps and value stocks.
“In the initial phase of the pandemic, small-cap and value sticks with underperformed, weighed down by lockdown restrictions and economic uncertainty,” Lustig said. “Large-cap growth stocks, heavily skewed toward the Information Technology (IT) and Consumer Discretionary sectors outperformed.”
However, as optimism recovered, small-cap stocks rebounded much faster than value stocks and have now considerably outpaced large-cap stocks over the course of the pandemic, which Lustig said has stretched their valuations.
“Value stocks, on the other hand, have only begun to regain the ground they lost relative to grit companies in 2020 – a year in which came on top of a decade of generally strong performance by growth stocks,” Lustig said.
Therefore while both small-cap and value stocks could both benefit of growth accelerates, in Lustig’s view value stocks offer more potential upside over the coming year.
Fortune favours the prepared
So, if 2021 proves to be the year that value finally outperforms growth, why should investors take a balanced approach going forward? Lustig argued that it is because fortunes can change quickly.
“We think investors should consider balancing value and growth in their portfolios by introducing a tactical tilt to value,” he said. “Growth may have underperformed in recent months, but we may see further rotations in investor sentiment.”
At the same time, Lustig said over the long-term, IT remains an attractive sector with room for continued innovation and that changes wrought by the pandemic will have long-lasting impacts.
“Balancing value and growth is a healthy way to diversify portfolios and to mitigate the regret risk of wrongly betting on one style over the other,” he said.