As an investment advisor, you understand the importance of adapting portfolio strategies to align with the ever-changing market environment. Mid-year 2024 presents a unique opportunity to reassess and potentially reallocate client portfolios. The current market dynamics strongly suggest that a shift from growth to large-cap value stocks is not only imminent but also advantageous.
Historically, the rotation from growth to value stocks has been driven by various economic and market factors. Traditional drivers include changes in interest rates, inflation, and broader economic conditions. However, this time, the scenario presents some unique aspects that differentiate it from previous cycles.
Economic Factors Driving the Shift
Inflation and Interest Rates: Higher inflation and rising interest rates typically benefit value stocks more than growth stocks. Growth stocks, often characterized by long-term growth potential, are more sensitive to interest rate increases as they rely heavily on future earnings. In contrast, value stocks, with their more immediate cash flows and dividends, tend to perform better in such an environment.
Valuation Metrics: The current valuation spreads between growth and value stocks are historically wide. Value stocks are trading at significant discounts compared to their growth counterparts, making this an opportune time for a rotation. Research reveals that value stocks have historically outperformed during periods of high inflation and rising interest rates.
Technological and Secular Trends Favoring Value Stocks
Technology Adoption: Many companies traditionally classified as value stocks are now early adopters of new technologies, providing them with competitive advantages and growth potential. This technological integration blurs the lines between growth and value stocks, creating hybrid opportunities that combine stability with growth.
Secular Themes: Trends such as global electrification, decarbonization, and artificial intelligence are driving growth in sectors traditionally associated with value stocks. For instance, companies like Quanta Services are benefiting from increased demand for infrastructure supporting AI and green energy projects. Similarly, Broadcom and Micron Technology are leveraging technological advancements to enhance their growth prospects while remaining value stocks.
Strategic Moves for Advisors
Taking Profits in Growth Stocks: The current market conditions provide an excellent opportunity to take profits from high-performing growth stocks. With growth stocks reaching peak valuations, reallocating these gains into undervalued large-cap value stocks can enhance portfolio performance.
Investing in Value Stocks: When selecting large-cap value stocks poised for growth, consider criteria such as technological integration, strong fundamentals, and exposure to secular growth trends. Examples of successful value investments that meet these requirements include:
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Micron Technology and Broadcom: Both companies are key players in the semiconductor industry, benefiting from the growing demand for AI-related products.
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Quanta Services: Specializes in essential infrastructure work for AI and green energy, offering strong growth potential.
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Martin Marietta Materials: Positioned to benefit from infrastructure development and reshoring trends.
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Caterpillar and Parker Hannifin: These companies provide essential machinery and products for industrial development, benefiting from increased infrastructure spending.
Conclusion
The current market environment, characterized by high inflation, rising interest rates, and significant valuation spreads, makes a compelling case for a growth-to-value rotation. By understanding and capitalizing on these dynamics, you may enhance your clients' portfolio performance and resilience. For a deeper understanding and practical insights on this topic, download our comprehensive eBook on the evolution of large-cap value investing.
RISK DISCLOSURES
Definition of the Firm: Great Lakes Advisors, LLC (“Great Lakes” or “GLA”) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. Established in 1981, Great Lakes is a subsidiary of Wintrust Financial Corporation and a part of the Wintrust Wealth Management family of companies. Great Lakes is a distinct business unit with distinct investment processes and procedures relating to the management and/or trading of investment portfolios for its clients. On October 1, 2013, majority owned subsidiary Advanced Investment Partners, LLC (“AIP”) became fully-owned and integrated into Great Lakes. On April 3, 2023, Rothschild & Co Asset Management US Inc. and Rothschild & Co Risk Based Investments LLC became fully-owned and integrated into Great Lakes.
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