Value Rotations
The idea:
Tech is back leading the global equity market recovery, with the US outperforming many developed equity markets. However, on most of our metrics, this tech outperformance may have run its course, suggesting scope for some new investment ideas to emerge. If inflation is set to trough over the coming few months, investors may start to position for that outcome and rotate out of tech and “growth” stocks and back toward more “value” plays. As well, an investment theme we continue to emphasize is European defense spending.
The strategy:
A rotation back toward more value plays can be executed directly in the growth and value “factor” indexes, but investors could also sell holdings in US tech hardware and software stocks and reinvest the funds into less well-liked areas such as insurance, or even the over-sold health-care sector. There may be structural negatives on health care, but on a technical view it is very oversold. Normally, these kinds of technical signals do better signaling “buys” than “sells,” but it is a short-term trade — as in the next three months rather than the next three years.
We look at these sectors from a macro/momentum perspective and would be looking at broad sector ETFs rather than focusing on, say, biotechs or pharma per se, or the life- or non-life insurance sectors. But based on our tactical indicators, an area such as medical equipment is oversold, and therefore has the potential to bounce. Between the life and non-life insurance sectors, the non-life sector has comfortably outperformed the life sector and we would expect to see a bit of a catch-up.
The push for increased European defense spending presents another opportunity. Most European NATO members agreed to increase their defense spending toward 5% of GDP from less than 2% of GDP currently. Even though we have already seen good gains in some of the leading players, there looks to be plenty more scope for further gains.
The big picture:
The April hiatus in financial markets seems a long way behind us. Even war in the Middle East only tempered the upward trend, and once the conflict ended, with the potential danger to global oil flows reduced, we saw the good times roll once more. The main driver for enthusiasm in equity markets is the combination of policy rates looking set to fall further, especially if President Trump gets his way, as inflation measures moderate, alongside weakening in the US dollar. A weaker dollar tends to be positive for global liquidity and global growth. The bad news is that a weaker dollar might also see US inflation reaccelerate in the latter part of the year, even without any further boost from US tariffs.