Carmignac: Rotation into value is just a trade, it is not a structural change in market leadership

We stick to our very strong backbone of high quality non-cyclical growth stocks, we keep for the time being a moderate tactical exposure to cyclical sectors, primarily in Europe, and keep 7-8% of our Carmignac Patrimoine equity portfolio in Gold. And we keep using mostly our Credit exposure to capture what we consider to be the remaining of the “value revenge” trade.

The nature of this rally is very unusual. It takes place while Investor Sentiment remains quite depressed. In other words, for lack of visibility into next year, investors have shortened their investment horizon. They mostly trust that the reopening will at least not turn into a disaster, they count on central banks to keep up asset prices and play this optimism through the cheapest stocks. Very few investors would probably want to own for the long term any of the stocks that are sky-rocketing now, because they are very low quality. So this rotation is built on sand, but it can probably last as long as this optimism is not shattered by reality, and we might not know that before a couple of months.

During the Tech bubble, valuation extremes were due to excessive optimism on earnings growth. This time it is not the case, it is even the opposite. The rise in valuation takes place within a growing Japanification of the world, with very low growth expectations. This has led to a two-tiered market: high-visibility growth stocks trade at a premium, while cyclical stocks trade at a discount. And the cyclical stocks have rallied because they had become really cheap, but they will in our opinion remain fundamentally cheap because their earnings growth potential is very fragile indeed:

a. Bankruptcies are starting to rise, inevitably, despite the Government Support programs.
b. In the US, the very strong jobs report last week which surprised every economist was actually to a large extent close to a manipulation of statistics: a lot of temporary unemployed people were shifted from Federal unemployment programs to programs that are channeled through the companies, whereby employees still stay at home, but they are officially rehired, so that the employers get the subsidy, and the employees get off the official lists of joblessness. It is very clever from a political angle, but it will not create consumer demand. The permanent layoffs actually started to increase last month from a very low base, and this is where the trend is likely to deteriorate.

The Coronavirus crisis is an extraordinary one-off event, and global activity is likely to rebound towards more “normal” levels if we do not get a bad surprise with the virus. But below the surface, there are deep recessive factors, like corporate margins, which were already under pressure going into this crisis, and which will get worse, or private and public debt, which are now growing even faster, and which are building the scene for quite a bleak economic picture for 2021.

Therefore we remain convinced that rotation into value is just a trade, it is not a structural change in market leadership. If anything, growth scarcity is going to become even more a factor going forward.
Value stocks are cheap because they generate low returns on equities (the case of European banks is obviously quite telling). And Growth stocks are expensive because, through the cycles, they generate higher ROEs. In a slow growth environment, or in a recession, it makes all the difference, and this is why even if our equity/credit exposure has been more constructive lately, our core sector positioning has remained unchanged.



Veranstaltungshinweis:

• nächste Woche Donnerstag, 18. Juni, wird Carmignac um 11:00 Uhr vormittags einen exklusiven Media-Roundtable veranstalten, zu dem wir Sie gerne einladen möchten.

• Didier Saint-Georges, Mitglied des Strategischen Investmentkomitees, wird diesen abhalten und anschließend für Ihre Rückfragen gerne zur Verfügung stehen.

Der auf Englisch gehaltene Roundtable gibt einen Makro-Ausblick auf das zweite Halbjahr

Wenn Sie an dem virtuellen Pressegespräch teilnehmen möchten, geben Sie uns bitte kurz Bescheid und wir schicken Ihnen die entsprechenden Zugangsdaten zu.