After more than a year of Covid crisis, it is time to take stock. The pandemic has led to a worldwide economic recession. Entire sectors of the global economy were slowed down or even stopped for several weeks. In Belgium, the latest forecasts of the Federal Planning Bureau in February 2021 show a contraction of Belgian GDP by 6.2% in 2020.
Fortunately, we can now see an improvement in the situation and hope for an economic rebound in the years to come, thanks in particular to the ongoing vaccination strategy. The Federal Planning Bureau expects Belgian GDP to grow by 4.1% in 2021 and 3.5% in 2022.
« The economic rebound expected in 2021 could lead to a sector rotation in stock markets, with a greater preference for value stocks at the expense of growth stocks. »
The dominance of growth stocks over the last stock market decade
Over the past ten years, investors have largely favoured growth stocks. This kind of securities relates to companies whose operations and earnings are growing rapidly. On the one hand, companies following this growth strategy are expected to increase their profits faster than their industry peers or the market in general. On the other hand, these stocks are characterised by higher volatility given their high growth expectations.
Growth stocks benefit more from the current low interest rate environment set up by central banks. Indeed, because of their strategy, these companies have significant financing needs. This particular context of low interest rate facilitates their access to financing and allows them to ultimately achieve their goals. Over the past decade, the low interest rate and limited growth environment has allowed growth stocks to reach very high valuations, as evidenced recently by the technology sector.
The return of value stocks following the economic rebound
In order to take full advantage of the ongoing economic rebound, investors are now turning to more cyclical stocks, whose prices had fallen sharply since the outbreak of the coronavirus. These include value stocks characterised by a relatively slower growth, an often more recurring dividend and a lower volatility. Value stocks frequently show a low price-to-book ratio and are particularly well represented in the financial, energy and utilities sectors.
As global economy picks up, the return of inflation seems to be confirmed by soaring prices for commodities such as timber, iron ore or grain. This acceleration in price increases may lead central banks to raise interest rates in the medium term, therefore putting pressure on the equity market. As growth stocks are riskier than value stocks, investors may prefer the latter when interest rates rise. Furthermore, this sector rotation could motivate value companies to launch a share buyback program.
« The current economic rebound points to a return of inflation that may lead central banks to raise interest rates in the medium term. »
Thanks to the ongoing vaccination strategy, we can now hope for an economic recovery in the coming years. The rebound of global demand is leading to an acceleration of price increases, which may ultimately lead central banks to raise interest rates in the medium term. This context is favourable to value stocks, which have been particularly neglected in recent years, since they are less volatile than growth stocks. In addition, the greater preference for value stocks may encourage these companies to buy back their own shares. Time will tell whether this is a simple catch-up effect or a real sector rotation.