Weekly Market Recap

It’s what you value

28/06/2021

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

Week ahead

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

Source: FactSet, MSCI, J.P. Morgan Asset Management. Data reflect most recently available as of 25/05/21.
All returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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