The massive rotation to value shares is done and dusted and it's now time to return to the growth winners that carried 2020.
That's the opinion of Nucleus Wealth head of investments Damien Klassen, who revealed his team repositioned its portfolios earlier this month.
"We have… called time on the value trade," he said in a memo to clients.
"The current inflation spike looks to be short term and will likely recede over the next 6 months."
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Growth is back, baby
The Nucleus team has returned to the growth shares that served investors so well during the post-crash rally last year.
"We have made some substantial changes to reduce weight to the stocks we perceive will be the losers from the new environment: banks, resources and value stocks," said Klassen.
"The replacements are similar to the winners from 2020: quality growth — think profitable technology — and defensive."
The strategy is a classic "barbell portfolio" with growth shares at one end and interest-rate sensitive defensive stocks at the other.
By "quality" growth shares, Klassen clarified he meant "stocks that can grow considerably above-trend" that will look appealing in a low-growth world.
"If you were looking for maximum returns, you might buy 'junk' growth stocks — ones with little to no earnings which often perform best in this type of environment," he said.
"We look at our portfolios differently though. Risk is an important factor, and the junk growth stocks are far from cheap and have as much downside as they do upside."
Inflation now is not the same as the 1970s
Inflation ran out of control in the 1970s, causing grief for the entire global economy.
But Klassen said that the fundamental forces controlling prices and wages were entirely different now.
"The rules have changed since then. We looked at technology being inherently deflationary. Net result: a financial system overengineered to prevent inflation."
The rotation back to growth now also means investors should look at moving their money from the ASX to overseas shares.
"Australian equities have been a good source of investment performance in recent months. Now, they are facing a higher risk of reversal," said Klassen.
"It is time to use the high prices here to switch to international equities. We are building the defensive side of the portfolio up, changing out of value winners like resources, banks and cyclical industrials. A more aggressive switch into quality/growth is ahead if we see the opportunity developing."
