The ongoing global COVID-19 situation remains fluid with countries such as the US experiencing record high COVID-19 fatalities, while many European countries are back in lockdown due to second and third waves. Meanwhile Australia and other countries are emerging from lockdowns. The hopes of a vaccine solution by late 2020 or early 2021 to help allow a pathway back to normality became clearer in November. We now have three vaccine candidates from Pfizer, Moderna and AstraZeneca that look promising together with Chinese and Russian vaccines that are also touted as being successful.
The prolonged period of elevated risks appears to be reducing as uncertainties around COVID-19, the global trade war and US election —to name a few—are clearing up. We always believed that two conditions precedent were required for the value rotation to take hold: clearing the US election and positive news on either a vaccine or therapeutic protocols. Both occurred in the same week in early November, spurring a market rally and sharp rotation into value.
The global business cycle continues to surprise on the upside with strong Purchasing Manager’s Index (PMI) and Institute of Supply Management (ISM) data helped by the unprecedented and quick government interventions. With vaccines on the horizon, economies are likely to start the long road of recovery out of the pandemic-induced economic shock.
Interest rates have essentially been anchored by central bank intervention globally while inflation expectations are showing a recovery from low levels. This setup has historically been positive for value as bond yields trickle up, resulting in a steepening of the yield curve.
M&A is likely to be part of the recovery process given the low interest rate environment, and cash position of private equity and corporates. The earnings yield to debt yield gap remains wide and thus corporates can buy earnings growth very cheaply with debt.
The banks appear to be well provisioned and we expect increased profits and dividends going forward over the next few years.
Despite the recent rotation and thus sharp rally in value, it has still materially underperformed growth over the past 12 months and has a long way to reverse this underperformance. We have seen in the past that value typically outperforms for at least 12 months after a major trough in earnings.
The tough decade for value investors has created attractive investment opportunities that a well-disciplined value investor can harness. Our process is well positioned to take advantage of the opportunity set that requires a long-term investment horizon that looks through the current uncertainty, and a detailed bottom-up focus that identifies attractively priced companies that we believe are positioned to be rewarded in the economic recovery.