What’s going on?
The global economy has been left bruised and battered by the last year, but it looks like it’s finally starting to recover in earnest.
What does this mean?
Now that the world’s in recovery from the pandemic, the economy’s expected to hit 5.6% growth this year. That’s good news for companies, even if it won’t benefit them all equally: fast-growing firms like those in tech should continue to steadily grow their earnings, but “cyclical” companies should get a much bigger boost from the uptick in economic growth.
Investors trying to capitalize on that trend have been buying cyclical “value” stocks, whose share prices should rise in line with companies’ earnings growth. And to make room for them in their portfolios, investors have been selling off growth stocks – so much so that the tech-heavy Nasdaq collapsed into a correction last month.
Why should I care?
Zooming in: Investors are ultimately looking for growth.
Analysts at UBS reckon stock market investors are always chasing the same thing: companies with high earnings growth. And while that might work in cyclical and value stocks’ favor in the near term, investors will eventually return to stocks that can promise growth year in, year out. That’s what seems to have happened in the past, after all: growth stocks have outperformed value for most of the last 50 years.
For markets: Here’s how the rotation is playing out…
Recent data showing the movement of investors’ money into and out of certain funds shows how much of a rotation there’s been in the last month. Stock market investors have opted for emerging markets over developed ones, and industrial and financial stocks over healthcare, utilities, and real estate. Bond investors, meanwhile, have opted for inflation-protected bonds, while selling out of previously popular but risky “junk” bonds.