The world is changing fast and to keep up you need local knowledge with global context.
By Sean Peche, portfolio manager at Ranmore Funds
“Inflation is beaten, and the coming recession means the Central Banks will lower rates, which means you should switch from Value back to Growth”
“What do you think of that common thinking?” asked a client yesterday
“Who knows, but I’m not sure inflation is beaten”, is how I began,
Yes, June’s average oil price fell 22% to $71 from $91 last year so that helped the monthly number and it’s a similar story for food products like maize and wheat, as the chart shows
But it’ll get tougher from here
Not only because those numbers are now in the base,
but also because changing weather is sure to disrupt food & energy supplies causing inflationary spikes
As for recession concerns?
Well, I won’t risk adding my name to the long list of those who called this one badly, especially since our process isn’t dependent on recession calls
Now to the question, “Will Central banks lower rates?”
Somewhat presciently, I listened to an excellent interview of the former BOE Governor, Mervyn King, on the podcast channel, “Merryn Somerset Webb Talks Money” – about too much of it chasing too few goods..
It’s a fabulous interview so please listen
And I thought this was his key sentence,
“Having lost credibility, it’s tough now for Central Banks to take a balanced view because they may feel that the worst thing for them is to be proved wrong again on the upside.”
I think he’s right
So even if inflation does stabilise at 2%, does anyone really think the Central Bankers are about to lower rates meaningfully?
Surely someone on the Central Bankers Whatsapp Group will remind the others that ultra-low rates spawned:
Held to Maturity losses
Excess Commercial Real Estate lending by Regional Banks
any other speculation
Nope, I just can’t see it
But ignore what Lord King or I think, what does the bond market think?
Inflation was last around 3% in July 2018, April & December 2011, and October 2008
And what were the 2yr Treasury yields back then?
2.6%, 0%, 0.6% & 1.5%
What’s it now?
So either the bond market is missing something, or it doesn’t think rates aren’t going lower
And the bond guys I know are pretty smart 😉
So, all that’s left, is the question, “Is it a good time to switch from Value to Growth?
Well last week the MSCI Value beat MSCI Growth by 2.64%
Short term, I know, BUT for those who like this kind of stuff, there have only been 29 weeks out of 1229 (2.4%) when Value has beaten Growth by that much or more
in 23.5 years!
And Excel tells me Value out-performed Growth over the next year 63% of the time
with an average outperformance of 6%
Compared to the -1% average annual underperformance (well we’ve had a few growth bubbles in there!)
Now for my money, I find data like that mildly interesting
Why only mildly?
Because I think Value investing makes sense 100% of the time
- This article appeared first on Peche’s page on LinkedIn.
- Elon Musk’s Twitter to become fintech hub, challenging banking giants
- Composition of coalition “pact” government on the agenda at historic national convention
- Agrizzi: It was a “travesty” – After victory over SARS
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.