Global Weekly Commentary: Pockets of value in stocks as rates rise
Value vs. growth
We think value stocks can outperform as interest rates head higher. Regions and sectors help us find quality within value and growth at a reasonable price.
Stocks slid after the Federal Reserve’s preferred inflation gauge showed persistently high inflation, reinforcing why we see more rate hikes ahead.
We see a tight labor market in the euro area keeping core inflation elevated. China’s services PMI should show the economy’s rapid restart is playing out.
Growth stocks have led the U.S. equity rally so far this year, halting outperformance in 2022 by value equities. We believe value stocks can resume their climb as major central banks keep interest rates higher for longer. 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.
Value vs. growth
Russell 1000 Value index relative to Growth, 2013-2023
Source: BlackRock Investment Institute, with data from Refinitiv Datastream, February 2023. Notes: The chart shows the U.S. Russell 1000 Value total return index divided by the U.S. Russell 1000 Growth total return index.
The new regime is not a typical business cycle and requires a new playbook. That applies to equity style factors, too, in our view. Value stocks – or those seen as undervalued relative to fundamentals – lagged growth stocks for much of the past decade (left chart). That switched abruptly in 2022 when central banks started rapidly tightening policy – only to be followed by a value dip early this year on hopes for policy easing (right chart). We think value can regain the lead. Why? Higher interest rates and inflation, and a steeper yield curve. That all favors value over growth, in our view. It’s not about choosing one factor over another: Factors mean different things to different people, and the composition of factors also changes over time. Case in point: The healthcare sector is now a modest overweight in the MSCI USA Value index compared with an underweight in 2008.
Our macro view supports a case for value over growth. Higher interest rates feed into higher discount rates, making future cash flows of growth stocks less attractive. We also think persistent inflation is likely to lead investors to demand more compensation for holding long-term government bonds, driving yields higher. Value tends to outperform when the yield curve steepens, we find. While value historically underperforms heading into recession because capital-intensive companies can’t respond quickly to changing cycles, we think that could be different in this atypical economic cycle. Value is still attractive after being beaten down for so long. Companies in the value bucket have also had time to prepare for a well-telegraphed downturn. Case in point: Many banks have already provisioned for losses in advance of a recession. Lastly, we expect a mild recession, so we think the performance impact is likely to be softer on value companies than in past cycles.
Our current asset allocations across regions and sectors have a value tilt with quality characteristics. We find that emerging markets (EM) and Europe have a consistent value bias when looking at the composition of indexes and key company metrics. For sectors, we see energy as a fusion of value and quality. We find value in the sector after being unloved and undisciplined with capital in the past. We think its stronger balance sheets, better investor payouts and improved return on equity give it more of a quality tilt. We find value in financials as well, but not the same quality. We see the sector capitalizing on higher rates with improved net interest margins after years of ultra-low or negative rates in some cases.
Healthcare has become more of a value sector but also has characteristics of growth. This speaks again to how factors can have different meanings and evolve over time. We like healthcare for its growth prospects but at the right price – valuations look reasonable to us relative to other growth sectors. We also see quality in healthcare’s defensive characteristics during a recession and think aging populations bolster structural growth in demand.
We prefer to be selective within our cautious view of developed market equities. 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 favor value. We find value in the energy and financial sectors and focus on quality within these sectors. We also like healthcare but at a reasonable price.
Global stocks retreated further this week, with European equities faring better than U.S. peers. Short-term U.S. yields jumped to a 16-year high, with the yield curve at its most inverted since the early 1980s. The U.S. PCE inflation data showed stubbornly high core inflation. This reinforces our view that sticky inflation likely means major central banks will have to hike rates further and keep them higher for longer to bring it back down to their 2% targets.
Euro area inflation data this week will be key for gauging how much higher the European Central Bank might lift policy rates. We’re also watching unemployment data for signs of further labor market tightness that could stoke persistently high core inflation. China’s services PMI will help assess how rapid the economy’s restart has been.
U.S. consumer confidence
U.S. ISM manufacturing PMI
Euro area unemployment and flash inflation
China Caixin services PMI
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of Feb. 23, 2023. Notes: The two ends of the bars show the lowest and highest returns at any point in the last 12-months, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, Refinitiv Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
© 2023 BlackRock, Inc. All rights reserved.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of Feb 27, 2023, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.
In the U.S. and Canada, this material is intended for public distribution. In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL, Tel: +44 (0)20 7743 3000. Registered in England and Wales No. 00796793. For your protection, calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. For qualified investors in Switzerland: This document is marketing material. This document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services ("FinSA"). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa. For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. Blackrock Advisors (UK) Limited - Dubai Branch is a DIFC Foreign Recognised Company registered with the DIFC Registrar of Companies (DIFC Registered Number 546), with its office at Unit 06/07, Level 1, Al Fattan Currency House, DIFC, PO Box 506661, Dubai, UAE, and is regulated by the DFSA to engage in the regulated activities of ‘Advising on Financial Products’ and ‘Arranging Deals in Investments’ in or from the DIFC, both of which are limited to units in a collective investment fund (DFSA Reference Number F000738) In the Kingdom of Saudi Arabia, issued in the Kingdom of Saudi Arabia (KSA) by BlackRock Saudi Arabia (BSA), authorised and regulated by the Capital Market Authority (CMA), License No. 18-192-30. Registered under the laws of KSA. Registered office: 29th floor, Olaya Towers – Tower B, 3074 Prince Mohammed bin Abdulaziz St., Olaya District, Riyadh 12213 – 8022, KSA, Tel: +966 11 838 3600. The information contained within is intended strictly for Sophisticated Investors as defined in the CMA Implementing Regulations. Neither the CMA or any other authority or regulator located in KSA has approved this information. The information contained within, does not constitute and should not be construed as an offer of, invitation or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. Any distribution, by whatever means, of the information within and related material to persons other than those referred to above is strictly prohibited. In the United Arab Emirates is only intended for - natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws. In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities. In Qatar, for distribution with pre-selected institutional investors or high net worth investors. In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions). In Latin America, no securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx
Not FDIC Insured | May Lose Value | No Bank Guarantee
© 2023 BlackRock, Inc. All Rights Reserved. BLACKROCK, iSHARES and ALADDIN are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.