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As the US economy moves towards reopening and a return to normalcy, we expect the Federal Reserve (Fed) to let the economy ‘run hot’ in the near- to medium-term, meaning reflation and a steeper yield curve.
With a ‘V-shaped’ recovery underway, such conditions - combined with still excessive growth versus value valuations, in our opinion - could enable an optimal setup for US value to outperform beyond its initial move last September.
Beyond that, US value provides a unique combination of structural growth, quality, ESG improvement, stability, defensiveness, and relative valuation support - a unique opportunity for sustained performance for both the US and global markets. Virtually all other segments of the market provide only one or two of these features, but in our view US value has them all.
We believe nearly a quarter of the US value universe represents the next leg of innovation. We expect the future incremental profit pools of the technological transformation of the economy (e.g., cloud infrastructure, automation, artificial intelligence, machine learning) to accrue to the firms with the size and scale to deploy new technology to transform their businesses.
The US is in the early stages of an investment cycle into economically viable renewables. Much of Europe has already converted, but the US could see 10 to 20 years of meaningful investment into profitable renewable projects.
Nearly three-quarters of the US large cap value universe represents secular growth, stability and defensiveness, while the composition of value differs globally.*
US value has been more profitable and is forecasted to have higher growth in 2021 and 2022 than the core markets of the rest of the world, as shown in the figure below. Moreover, valuation is approximately the same in US value and other value segments, while debt levels are lower.
There is a misperception that value companies must be deep value or have distressed business models. However, we estimate that nearly half of the large-cap value index is comprised of companies with relatively stable and/or defensive characteristics that are also structurally sound. We estimate that nearly half of US value represents stability and defensiveness.
Historically, value has outperformed growth, but this has not been the case since 2014, the longest stretch since the at least the 1960s. Growth has traded at the largest valuation premium to value since the 2000 tech bubble. The narrowness of the US market in the past couple of years suggests to us this anomaly is likely to end.
Since September 2020, the market has broadened and we have begun to see cracks in the dominance of growth over value. It is important to note that any recent performance of value vs. growth is only the tip of the iceberg; there is a long way to go before valuations get back into line with historical averages.
*ISS EVA and Bloomberg data as of 2/10/2021
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 4 March 2021. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.