BlackRock backs value stocks as rate outlook turns hawkish
According to the latest analysis from global asset manager BlackRock, the early year rally in growth stocks could be short-lived, amid mounting expectations of a “higher for longer” interest rate environment.
The US Federal Reserve, along with peer central banks from around the world (including the Reserve Bank of Australia), had signalled further monetary policy tightening over the coming months.
The hawkish outlook had come off the back of stronger than anticipated inflation figures, with the US recording annualised inflation of 6.4 per cent in January.
Aggressive tightening over the course of 2022 dampened demand for growth stocks and fuelled investment in value stocks, according to BlackRock data.
As such, renewed commitments to monetary policy tightening from the central banks in 2023 were expected to produce a similar trend.
“We believe value stocks can resume their climb as major central banks keep interest rates higher for longer,” BlackRock observed.
“Higher rates reduce the value of future cash flows, weighing more on growth stocks and reinforcing our developed market equities underweight.
“Underneath that, our sector and region preferences tilt to value with quality attributes and growth at a reasonable price.”
BlackRock acknowledged value stocks typically underperform in the lead up to a recession, which had been forecast later this year.
However, companies in “the value bucket” have “had time to prepare for a well-telegraphed downturn”, including banks, which have “already provisioned for losses in advance of a recession”.
Moreover, the asset manager was forecasting a “mild recession”, which was likely to result in a “softer” performance impact on value stocks.
BlackRock had touted emerging markets (EM) and European value stocks, which had “consistent value bias”.
On a sector level, the asset manager backed energy companies, which had “a fusion of value and quality”.
“We find value in the sector after being unloved and undisciplined with capital in the past,” BlackRock observed.
“We think its stronger balance sheets, better investor payouts and improved return on equity give it more of a quality tilt.”
Other sectors touted by the firm included healthcare and financials — the latter of which could capitalise on higher rates with improved net interest margins.
“We prefer to be selective within our cautious view of developed market equities,” BlackRock noted.
“We like sectors and regions with a value bent while we stay nimble in this new regime of heightened macro and market volatility.
“We think structurally higher inflation, higher-for-longer interest rates and our expectation for a steeper yield curve all favour value.”
AUTHOR
Charbel Kadib
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