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Value stocks tipped to outperform as global inflation takes root

February 2, 2022

Value stocks tipped to outperform as global inflation takes root

Australia’s iconic summer barbecues were jeopardised this year as COVID’s latest scion, the Omicron variant, created supply chain bottlenecks that left supermarket shelves empty around the country. 

Australia’s iconic summer barbecues were jeopardised this year as COVID’s latest scion, the Omicron variant, created supply chain bottlenecks that left supermarket shelves empty around the country. 

This experience was not unique to Australia. In the US, consumers were forced to wait – sometimes for several months – for products they could previously pick up at their local store on a whim.

These pressures have subsequently bid up the prices of consumer goods, helping a set of broader inflationary forces take root.

Fearing these prices gains could hobble the economy just as it is emerging from the grip of a global pandemic, central banks around the world are signalling the time has come to raise rates, with the US Federal Reserve pointing to as many as three increases this year.

Reassessing values 

Under these circumstances, many investors and economists expect to see a rotation out of growth stocks into value names.

Growth stocks – companies that are expected to grow at an above-average rate and valued more so for their prospective capital gains – have outperformed their value counterparts for the better part of the last decade due to the cheap cost of capital.

These businesses typically need to take on debt or tap capital markets to fuel their growth, and higher interest rates mean the future earnings growth investors were banking on start to erode.

Value stocks, however, are expected to enjoy their moment in the sun should rates keep rising.

The term ‘value stock’ is applied to businesses that are considered cheap relative to their earnings, or to put it another way, they are companies that have been overlooked by markets.

Last year, those same overlooked businesses began to become popular with investors again, and this renewed interest is expected to continue.

No certainties in life

While the generally accepted view within the industry is that value stocks are on track to outperform, what’s less certain is which direction markets will go in the upcoming year.

New COVID variants, a much-vaunted return to inflation, ongoing supply chain challenges and looming elections both in Australia and in the US, where President Joe Biden’s Democratic Party will battle for control of the House and Senate in November’s midterms, all cast a cloud of ambiguity over market movements.

US volatility, measured by the Chicago Board Options Exchange VIX index, hit its highest level in 12 months earlier in January as investors began looking for downside protection amid the market’s wild swings.

 

While this has made it difficult for investors to use tried-and-true strategies like buying the dip, it can benefit investors trading dispersion.

Divide and conquer

Dispersion refers to the difference in performance between two companies or groups of companies, caused by differences between market volatility and market correlation.

Using a number of over-the-counter options, investors can generate returns from the dispersion between two groups of companies in a basket of shares.

Dispersion Series 40 is an investment structured to benefit from this difference, specifically seeking to generate returns from the gap we expect to see form between growth and value companies. 

It doesn’t matter if the market goes up or down – what we expect is that for a range of reasons a selection of value stocks will outperform a selection of growth stocks within the same basket.

The greater this dispersion is, the better the returns Dispersion Series 40 generates.

This is a leveraged opportunity and the minimum initial outlay of $8,200 will give investors $100,000 of exposure.

This is a limited recourse loan, too, meaning investors can’t lose more than their initial outlay for potentially uncapped upside returns.

Sources


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