From Disinflation to Inflation – The new postmodern cycle
🎧💡 #9 Macro & Business Insights
Hi all, and welcome back to The Macro & Business Insights!
In this research I’ll touch the follow questions and doubts:
Which are the reasons that poised Value to enjoy long-term tailwinds?
How can we try to harness the inflationary environments for taking the right choices?
Why REITs (often seen as a defensive asset during stock market corrections) it’s demonstrating us another history this time.
From disinflation to inflation, what we should know?
Value has outperformed Growth by a significant margin so far in 2022, leaving many investors guessing whether this resurgence is over or the start of a sustainable trend.
While valuations are important, investors need to ensure they get what they pay for.
Over the next 12 months, consensus estimates are calling for stronger earnings from Value sectors such as energy, industrials, materials and parts of consumer discretionary.
Value tends to perform well in inflationary environments.
Value’s under performance over the last decade makes its valuation compelling compared to the broader market, especially when considering its past and future expected earnings growth.
We are in a macroeconomic environment that we haven’t seen in 40 years: persistently high inflation and aggressive monetary tightening.
Portfolios on average have a large Growth overweight. The start to this volatile year has reminded investors the importance of balance, and flows into Value could be a tailwind.
First-quarter and second-quarter earnings handily beat expectations, and we expect third-quarter earnings to continue that trend, albeit at a slowing pace.
For the full year 2022, we now expect S&P 500 Index EPS of $215, showing modest growth over 2021 EPS of $210.
In 2023, Wells Fargo believe investors likely will anticipate a late-2023 to 2024 economic recovery, sending price-to-earnings multiples higher even as full-year earnings contract.
Real estate investment trusts (REITs) are often viewed as a defensive asset during stock market corrections, but this has not been the case in 2022.
During past stock market corrections, U.S. investors have often turned to defensive assets such as the U.S. dollar, bonds, and REITs.
REITs are largely struggling with performance because interest rates are rising. Rising interest rates increase the cost of capital for REITs, plus rising bond yields have become attractive alternatives to REIT dividend yields.
Investment returns should be weaker in this cycle as higher interest rates imply smaller contributions for valuation.
Goldman Sachs expect a more ‘Fat & Flat’ than a secular bull market with more focus on alpha than beta. Investors are likely to focus more on margins than revenues.
The modern era of disinflation started in the early 1980s. When Paul Volker became Fed president in the summer of 1979 US inflation was over 11% but, unlike today, US 10 year yields reached nearly 16%.
Restrictive monetary policy designed to reduce inflation by constraining demand heralded a prolonged period of low inflation and strong growth, supported by positive supply side reforms.
Equities performed strongly from the 1980s through to the end of the century and the collapse of the technology bubble.
Over this period annualised returns were in the midteens and the valuation expansion accounted for over half of the returns as interest rates fell and valuations expanded.
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.