Is the Value rally sustainable?
2020 has been a year of ‘fastests’. It was the fastest market meltdown back in March and the fastest market recovery in the following months after that. In November we’ve seen the fastest ever rotation between sectors where all of the momentum stocks that have been doing sensationally well over the past year sold off, and those unloved businesses that nobody wanted to own have all rallied quite dramatically.
In this video, I address the question: Can the 2020 value rally last? Watch the video or read the transcript to gain insight into how the stock market could look very different in the years to come.
Hi everyone, and welcome. It’s Steve Johnson here Chief Investment Officer at Forager Funds. We’ll keep this week’s video nice and short after last week’s marathon effort. I know the question on everyone’s lips is: is this value rally sustainable? 2020 has been a year of ‘fastests’. It was the fastest market meltdown back in March and the fastest market recovery in the couple of months after that. In November we’ve seen the fastest ever rotation between sectors where all of the momentum stocks that have been doing sensationally well over the past year sold off, and those unloved businesses that nobody wanted to own have all rallied quite dramatically.
That’s benefited both of our portfolios quite a bit but the question is, can it last? I think there are a few things worth thinking about on that front but number one is probably interest rates. These growth assets have been driven by very cheap money. I think importantly, at the value end of the spectrum lots of businesses have been kept alive and the capitalist system has been slowed down in terms of its creative destruction ability. We’ve seen lots of companies, for example in oil and gas services, where the competition that should have left the market has not and I question whether 2021 and beyond is going to start looking very different on that front.
I’m in the middle of a book that’s a history of the United States way back to its beginning. It’s really interesting the period from the Great Depression that started in 1929/30, through to 1940, where they struggled to get traction in the global economy, and particularly in the US economy. It wasn’t until the Second World War, when governments around the world ran massive deficits and racked up huge debts, but stimulated their economies significantly, that we saw the growth wage inflation that came through in the 40s, 50s and 60s.
Are we seeing something similar now? Well, I think if the conditions are ever going to be right they are in 2021. We’re going to see a recovering economy on the back of vaccine news. We are already running massive fiscal deficits, there are huge amounts of support, we have record monetary stimulus as well as in the form of very low-interest rates. I think, importantly, we have consumers around the world that are in a pretty good place. You’ve got savings rates here in Australia and in other places that are very high, people’s incomes have been propped up by the government, and they haven’t had a lot of places to spend it.
I think with all of those forces combining in 2021, you may be looking into 2022, 2023 and seeing some forces for higher inflation in the economy. And I think in terms of how the stock market performs, that is going to have a huge impact if it does unfold that way. We’re certainly not betting the farm on it, but I think there are still huge numbers of businesses out there that are good long term franchises that need strong economic activity. If we see that economic activity and a bit of inflation and some higher interest rates, you’re going to see those sectors perform very well from a stock market perspective and probably see the longer duration growth stocks dramatically underperform. I still love owning growing and good businesses though. We’ve got a few of those in the portfolio at sensible prices in both funds, and are definitely looking out for more if markets sell-off. I hope you’ve enjoyed this video and we’ll be back next week.
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Steve began Forager Funds in 2009, and now manages approximately $470m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.