Value investors will benefit most from the current themes stalking the markets according to a January 3 Global Equity Strategy note put together by analysts at investment bank Jefferies.
According to the note, the return of inflation and the shift in the term premium ought to be the focus of investors going into 2017. Equities are long duration assets, and as the yield curve steepens, low P/E and low P/B stocks with improving asset turnover could be the best assets to play the reflationary trade.
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Jefferies: Buy Value For Reflationary Trade
Value has underperformed growth since the financial crisis. Ultralow interest rates have sent investors charging into growth stocks, which has in turn pulled in momentum investors increasing the divergences in returns between the two styles. As inflation expectations increase and long-term rates move back to normality, value is once again becoming a favorite investing style among investors. Companies with high operational and financial will benefit the most from the reflationary environment as they will be able to hike prices and increase margins.
Europe and Japan will benefit more than other markets as the respective stock markets have plenty of cheap stocks that have struggled to improve profitability over the past decade with little to no inflation.
“The return of inflation and the shift in the term premium ought to still be the focus of investors going into 2017. Equities are long duration assets as yield curves steepen, low PE and PB stocks with improving asset turnover will remain in favor especially if pricing power returns.
The big turning point must be the rise in inflation. It is interesting to note that just as the US Presidential election took place, both Chinese and US corporate inflation indicators have turned (see chart opposite). Once again this will favor companies with high operational and financial leverage.
The bottom line is that higher long rates ought to favor low PB, low PE and improving asset turnover and is likely to prove a drag on expensively valued stocks with stable asset turnover. 2017 should turn out to be a good year for active value investors.”