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Investors give value stocks a second look as bond yields rally

A man walks by 14 Wall Street in the financial district of New York. — Reuters
A man walks by 14 Wall Street in the financial district of New York. — Reuters
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NEW YORK: US value stocks may be getting a second wind, as bets on economic strength bolster Treasury yields and lift cyclically-sensitive shares that have stagnated in recent months after a powerful rally earlier this year.


The S&P 500 value stock index , which is relatively heavily weighted in shares of financials, energy firms and other economically sensitive companies, is up 5.5 per cent from last month’s lows, outperforming its tech-heavy counterpart by more than a percentage point in a rally that accelerated over the past week. The value index is up 18 per cent this year, despite stalling after a strong start to 2021.


The move may herald a nascent comeback for the so-called reflation trade, a bet on rebounding economic growth that saw value stocks surge starting late last year alongside Treasury yields. Yields have climbed this time around as well, with the yield on the benchmark 10-year US Treasury , which moves inversely to prices, up about 20 basis points since last week, to 1.36 per cent, before pulling back on Friday.


“I do think value is somewhat of a coiled spring,” said Matt Peron, director of research at Janus Henderson Investors, who believes value could outperform for at least the next six months. “I do think it has another run left in it.” Investors pointed to several reasons for value’s rosier outlook. While the rise in coronavirus cases spurred by the Delta variant, remains a wildcard, signs that infections may be slowing in Europe and parts of the United States could mean that the lockdowns required last year will not be needed for the foreseeable future, Peron said.


At the same time, some investors believe growth will remain strong in the US even after peaking in the second quarter. US gross domestic product is expected to rise 6.1 per cent in 2021, and 4.8 per cent in 2022, according to Oxford Economics, stronger than what annual growth has been for the past decade.


“We haven’t seen growth rates this high in some time and that’s why we think ... value can keep outperforming, even once the rate of growth peaks,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. — Reuters


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