‘Inflation is beaten so growth stocks are back.’ Sean Peche: Not so fast.

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

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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,

Read more: Why 70% inflation is just one of Argentina’s problems

“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:

Bitcoin speculation
LDI implosion
Held to Maturity losses
Excess Commercial Real Estate lending by Regional Banks
SPACS
MEMEs
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?

4.9%

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!

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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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