By Sean Peche, portfolio manager at Ranmore Funds
âInflation is beaten, and the coming recession means the Central Banks will lower rates, which means you should switch from Value back to Growthâ
“What do you think of that common thinking?” asked a client yesterday
âWho knows, but Iâm not sure inflation is beatenâ, is how I began,
Yes, Juneâs 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
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But itâll 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 wonât risk adding my name to the long list of those who called this one badly, especially since our process isnât dependent on recession calls
Now to the question, âWill Central banks lower rates?â
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..
Itâs a fabulous interview so please listen
And I thought this was his key sentence,
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âHaving lost credibility, itâs 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.â
I think heâs 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:
Bitcoin speculation
LDI implosion
Held to Maturity losses
Excess Commercial Real Estate lending by Regional Banks
SPACS
MEMEs
any other speculation
Nope, I just canât 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%
Whatâs it now?
4.9%
So either the bond market is missing something, or it doesn’t think rates arenât going lower
And the bond guys I know are pretty smart đ
So, all thatâs 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!
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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
Not 2.4%
- This article appeared first on Peche’s page on LinkedIn.
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