GAM: From a Growth to a Value Bubble?


The ‘value’ investment style endured a miserable year in 2017, but GAM’s Hans Ulrich Jost believes that we are seeing early indications which could herald a return to valuation-based stock picking.

During the last 10 years, we have seen most yield curves being pulled into negative territory and staying there far longer than even the most dovish central banker anticipated. While this scenario appears to be the biggest aberration since the great depression, many market participants clearly believe it is the new normal and will persist forever. But it will surely unravel sooner rather than later?

‘Misunderstanding is generally simpler than true understanding, and hence has more potential for popularity’ Raheel Farooq, Poet and Philosopher

Between 2000 and 2007 markets transitioned from a major growth bubble to a major value bubble and this time around the shift is likely to be even more pronounced. The market has, since 2009, created some USD 2 trillion worth of new investment vehicles such as ETFs and a wide range of other products which are all chasing the exact same sensitivities – the proxies for low volatility, quality growth and yield. However, the idea that these products can continue to deliver robust returns is predicated on the assumption that economic momentum will wane and the five deflationary factors that have depressed inflation in a major way for almost a decade (fiscal tightening in the eurozone, the China effect, lack of wage growth, suppressed commodity prices and the growing influence of discount retailers) will remain dominant.

Conversely, we would point to the fact that December’s leading indicators are in fact eclipsing the peaks witnessed in 2007 and 2011, consumer confidence across Europe is starting to reach new highs and each of the five deflationary factors have already very visibly turned. Fiscal drag has become fiscal stimulus, China has recently reversed course, labour settlements are rising rapidly, most commodity prices are up 50% from trough levels and the discount retailers are no longer pursuing market share at any price. Yet, European value stocks continue to be priced for a deflationary scenario....Read whole article here

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