Fund managers with a growth bias are going to find it increasingly hard to ignore traditional value sectors, the manager of the Aberdeen Standard Equity Income Fund has said.
Thomas Moore said the macroeconomic headwinds the market is currently experiencing, such as inflation and interest rate rises, are very strong drivers of a market rotation.
Speaking to FTAdviser, he said: “What's happened in the last five years or so is that people have assumed that it would always be the same as it has been…[in that] stocks would keep going up forever.
“We’re seeing in the first two or three weeks in January this violent rotation out of these new economy sectors.
“As an income investor, some of the companies [within] these traditional company sectors are now producing such strong cash flows that it’s harder and harder for people with a growth bias to ignore them.”
These firms in traditional value sectors, which compose much of the FTSE, have previously suffered valuation de-ratings and soaring dividend yields as a result of the positivity in growth stocks, he said.
While this was happening, a number of these value firms were busy getting their house in order and remaining disciplined on capital, Moore said.
“As an example, Rio Tinto’s returns have surged, while they have been paying down debt and avoiding M&A."
The opposite happened to growth companies, he added, where rising leverage has fuelled ill-advised M&A.
“There is now the additional driver of economic recovery, creating a further driver of improvement in these companies’ returns – this is icing on the cake, allowing many of these stocks to have the strongest earnings momentum in the market.
“The tide has turned – and this makes it very hard for growth managers to ignore traditional value/income sectors.”
With inflation rising and central banks looking to tighten policy, some are saying the outlook for growth sectors is not looking positive.
Yesterday Paul Grainger, head of global multi-sector fixed income at Schroders told FTAdviser this is likely to be extremely negative for higher risk bonds.
He said: “The outlook for riskier assets such as credit is less attractive than it was in 2021. This is also in line with our views that central banks are becoming more attentive to global inflation risks and we are past peak growth for this cycle.