The RSMR Weekly Broadcast - The fate of value stocks: a long-awaited moment in the sun

There's no shortage of knowledge and expertise at RSMR! Each week we get our heads together and talk about events in the world and how investments are affected by them. Our broadcast tackles a wide range of topical issues facing investors from liquidity to the future of alternatives to politics and the pound. We like to think of it as cracking content for the financial adviser. Have a read & get clued up...

In Broadcast 55, we asked whether investors will fall back in love with the UK market and this week’s topic is a continuation of this theme. We’ll be talking about the dispersion between growth and value stocks in a value-orientated market. With large caps and technology stocks surging ahead, growth has outperformed value by a country mile.

Companies such as Microsoft, Amazon and Netflix have seen amplified growth and are leading the way in the US and following suit in the UK. You could say that these businesses are the winners and beneficiaries of the 2020 coronavirus pandemic. Society has become wholly reliant on technology for work, school, and shopping and these trends have driven and accelerated the rise of the technology giants.

We’ve all heard of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) but 2020’s victims, the value-based bunch, have given rise to the new acronym ‘BEACH’ (Booking, Entertainment, Airlines, Cruises and Hotels). With value companies as the clear economic losers, the division between growth and value companies has become even more exaggerated. For the first three-quarters of this year, the gap was the largest since the dot-com bubble peak in 1999.

Growth outperforming value is nothing new, but the chasm has been widening even further. Is there light at the end of the tunnel for these struggling value companies? The election of Joe Biden in the US has caused the markets to stir and a reversal has begun in anticipation of an increase in spending and subsequent economic stimulus; a potential market rally that could cause a rotation in fortune for long-suffering value companies.

We might have expected this rally to fizzle in the short-term but reports of a potential vaccine have caused a dramatic reaction in the market, further cementing the rise of value. Markets are forward- looking and consider what the horizon will look like in six to nine months’ time. The unveiling of encouraging results from the Pfizer PFE Covid-19 vaccine trial, followed a week later by Moderna’s MRNA announcement and now promising results from the Oxford trial, has caused markets to react almost instantaneously.

Hopes of an end to the pandemic have been raised and the shares of many economically sensitive companies have skyrocketed as a direct result. Some of the airline companies jumped 40% in one day and the older, more traditional stocks benefitted from some relief when their shares climbed significantly in value. The market is interpreting this potential discovery as an end in sight for the economic woes experienced by these companies, but it’s still early days, and the encouraging results from the vaccine trials won’t necessarily result in the marketing of successful drugs.

Not surprisingly Pfizer, which is seen as a value stock company, also saw their shares take a giant leap forward. In the UK, the large cap sector is up nearly 15% this month indicating a powerful, positive shift in the market and offsetting some of the poor performance seen since the start of 2020.

How do we measure this glimmer of hope? The market is expecting the BEACH stocks to be released from their pandemic nightmare. Even if the vaccine has a marginal benefit and is only available to the older generation, it could make a huge difference to the economy as it frees the rest of the population from the restraints of the pandemic and allows for a return to a more normal existence.

The value area of the market has suffered immeasurably from the twists and turns of 2020. All hopes are pinned on the success and roll out of a vaccine which will undoubtedly trigger a powerful boost to the market. Value companies stand to gain disproportionately from the anticipated surge in stocks and some might say that they have earnt their moment in the sun and are very deserving beneficiaries.

QUIZ QUESTION: How many volunteers took part in the Oxford vaccine clinical trials and from which countries?

LAST WEEK'S ANSWER: Online shopping began in 1979!