Don't fall into the 'rotation trap'

Inflation could pop up as the economy recovers. But here's why you shouldn't throw out all your ASX growth shares to buy into value stocks.

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A black and white vortex dragging down, indicating share holders falling into a rotation trap

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ASX growth shares may have deflated the last few weeks, but one expert has warned investors to not fall into the trap of going "all in" on value shares.

Overnight, the US Federal Reserve indicated interest rates would remain at zero until at least 2023, and it would tolerate inflation that may come in the meantime.

This boosted share investor confidence, pushing up US markets as well as the ASX in early trade Thursday.

DeVere Group chief Nigel Green said the Fed had a "tricky" two-day meeting this week.

"They had to communicate a balance between a COVID-scarred economy and a booming outlook.

"It was a fine line to walk and, clearly, they don't want to hamper a recovery that's just getting going."

Investors exhale, but where to invest now?

Now boosted by the confidence of low interest rates, Green expected investors to "top up" their portfolios with further purchases.

But he warned to avoid the "rotation trap".

"The danger is the massive hype surrounding rotation from growth stocks – those expected to grow sales and earnings at a faster rate than the market average – into value stocks," he said.

"It should not be a case of either value or growth stocks.  A properly diversified portfolio needs to have both."

According to Green, the post-COVID world will not return immediately – if ever – to the way life was before the pandemic.

"It's likely we'll maintain some lockdown habits like working from home more often, but we'll also be back in the gym. We'll travel and go to public events again, but we'll also be more conscious of the environment and hygiene procedures."

So value stocks might have roared the past few weeks, but it won't be a chronic downturn for growth shares.

"Does anyone suddenly seriously think Amazon.com Inc (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) and Tesla Inc (NASDAQ: TSLA) are not companies of the future also?"

Inflation fears are overblown

Inflation is the friend of value shares but the enemy of growth stocks. 

Green expressed doubt against fears this would be a chronic problem.

"We can expect some price growth as economies re-open, but this is likely to be short-term," he said.

"I think, as it stands now, longer-term inflation fears due to pent-up demand are being overplayed. For example, people might book one trip away, but they are unlikely to book 5 or 6 in one hit."

Trying to time the market is a mug's game anyway. So Green recommended investors make hay while rates are low and the economy is on the way up.

"Investors should use this time to build their wealth by topping up their portfolios – but they must do so judiciously."

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