The last few weeks has seen the ASX and US markets crucifying growth stocks in favour of value shares.
The S&P ASX All Technology Index (ASX: XTX) has lost more than 14% since its 10 February high, while the Nasdaq Composite (NASDAQ: .IXIC) has dropped 7% in a month – even after a slight bounce back this week.
The big theme driving this growth anxiety is the prospect of inflation, and its potential to raise interest rates.
"There are plenty of inflationists who have been forecasting an apocalypse for a dozen years. They are about to have their day in the sun," said Nucleus Wealth head of investments Damien Klassen.
"And you can bet they will be appearing in financial media to proclaim vindication."
Pre-COVID deflationary forces are still there
Klassen, posting on a Nucleus blog, posited that all the forces that suppressed inflation for 10 years before COVID-19 have not disappeared.
Those include:
- Technological advances driving prices lower
- Globalisation leading to competitive pricing
- High levels of debt, leading to constrained spending
- Increasing inequality, leading to higher income-earners saving more instead of spending
- Culturally low expectations of inflation, leading to less aggressive requests for pay rises
- Elevated unemployment driving low wage growth
As opposed to these deflationary forces, the drivers that will trigger inflation are all temporary phenomena caused by a one-off pandemic.
They include supply chain disruptions, structural consumption changes, supply chain changes, inventory rebuild, government stimulus and a lower US dollar.
Inflation could go one of two ways
Klassen proposed that one of two scenarios could play out.
The first path was if inflationary forces beat the deflationary ones.
"Inflation gets the upper hand, bond yields rise, and value stocks perform well. Growth stocks fall, quality stocks underperform," he said.
The second option was if those pre-COVID deflationary forces reasserted themselves.
"Deflation/disinflation resumes after a short inflationary shock," Klassen said.
"Bond yields fall, bond prices rise. Defensive stocks outperform, as does quality. Value stocks and financials underperform. Growth stocks are more complicated."
Which is the more likely scenario? Klassen predicted the first scenario would occur, then transition into the second.
"Without stimulus, we will be back to the second scenario tomorrow," he said.
"With the current stimulus, I'm thinking 6 to 12 months."
Don't sell your growth shares in a panic
Klassen's forecast that deflation would eventually retake the mantle from inflation matches with what other experts have said this week.
The investment committee for T Rowe Price Group Inc (NASDAQ: TROW)'s Australian operations is already pivoting from value shares to growth.
"Central banks made it pretty clear that they want low yields to be maintained. For this reason, we are sceptical about the ability for interest rates to derail the recovery," it reported.
"Recent actions taken by the Reserve Bank of Australia to buy government bonds to bring down long-term interest rates are a strong indication that monetary policy will remain accommodative."
Chief executive of UK's DeVere Group, Nigel Green, warned investors to not overdo the rotation out of growth into value.
"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."
