Weekly Market Recap
It’s what you value
Week in review
- U.S. composite PMI falls to 63.9
- Australia retail sales lower than expected at 0.1% m/m for May
- Eurozone composite PMI stronger at 59.2
- China PMI for manufacturing and services
- U.S. non-farm payrolls
- Australia housing finance
Thought of the week
The reflation trade and the rotation to value over growth has been tested in the second quarter of this year. The inflation outlook and central bank response to it is still a hotly debated topic, and the low yields on government bonds suggests that bond investors may have a different view than equity investors. However, the value rotation is likely to reassert itself as yields do eventually move higher along with earnings expectations given the robust growth outlook. The willingness of investors to “pay-up” for growth in the last decade explains some of their long term outperformance but also why they are so highly valued today. This means that value as an investment style remains very attractive compared to growth, given lower multiples on value. Rising yields also imply that highly valued growth stocks will experience valuation compression, something less likely to impact value stocks, even if their valuations do not rise.
Growth stock valuations still elevated
x, price to 12-month forward earnings
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