Value’s gradual rotation

Chad Padowitz

Talaria Asset Management

It takes 365 and a quarter days for the earth to revolve around the sun – or what we commonly call a year. A lot can happen in that rotation time as 2020 is testament.

In markets, some days seem like they will never end, while other days fly by like a comet. A day of the comet-like variety happened recently after the announcement of the Pfizer COVID vaccine, and it incorporated the continuation of a pattern that emerged around the end of August.

After years of seemingly drifting off untethered while growth stocks surged to record and apparently unsustainable valuations, the conditions for the slow rotation back to value stocks looks the most promising in years.

Firstly, the risk to growth equities is now more palpable with valuation multiples coming under greater scrutiny as investors see a path out from home working and lockdowns to a broader canvas from which the economy can grow. The difference in P/E ratios in the chart below showing opportunities in this space. 

Top 8 by index weight as at 30.11.20, forward P/E as at 1.12.20
Source: S&P 500 Growth and Value indices / Yahoo Finance

Plus with a Democrat President in the US waiting in the wings, fiscal and monetary stimulus will almost certainly be greater for the world’s largest economy, putting cash and jobs in the hands of the real economy sectors such as industrials, energy and utilities. This however, as discussed before, is a significant driver of a credible path toward inflation, of which even a small amount ought greatly to benefit short duration stocks over long duration – or, in other words, value over growth.


Average 5 year correlation of relative performance to six different measures of reflation: US and EU 10 year yields, US 10Y-2Y yield curve, CPI inflation, 5Y5Y inflation expectation and PMI, to 31/10/2020. Source: Bloomberg.

But it’s not just about what might happen – as Galileo observed from his telescope, so too our observations are already pointing this way more and more, with the below chart showing growth has already started to de-rate versus value. 

12m Trailing P/E premium/discount of MSCI Growth v Value indices
Source: Bloomberg

No one knows with certainty what will happen, but all these characteristics are favourable for value managers. If you add to these thematic drivers a fundamental bottom-up process for identifying opportunities in specific companies, then however long it might take for a rotation, or for however long it might last, the basis underlying each investment decision is sound. 

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The information in this article is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) for the Fund and consider whether the product is appropriate for you. Wholesale Units in the Talaria Global Equity Fund (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. A copy of the PDS is available at or by calling Australian Unity Wealth Investor Services team on 13 29 39. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication.

Chad Padowitz
Co-Chief Investment Officer
Talaria Asset Management

Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 20 years’ experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase the...

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