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Does the value rotation rally really have legs?

Its been a volatile first quarter of the year - but Phil Oakley is sticking to his guns
Does the value rotation rally really have legs?

It has been  a fascinating and volatile first quarter for equities as the rotation into value stocks has continued. But what happens when it runs its course - will the current flavours of the month be able to deliver when expectations rise? Meanwhile although quality growth stocks may have underperformed, indeed an S&P 500 tracker would have been a better, cheaper bet recently, there is still an argument for sticking with quality

By the time you read this the first quarter of the year will be over. In general, owning shares has been beneficial, but with a difference.

What we have seen is that the period of quality growth stocks outperforming value and cyclical stocks has come to an end. Leading quality growth funds have lagged the returns of markets in general both in the UK and globally. My Fantasy portfolios, which follow the same approach, have followed suit.

There have been many reasons for this. For some time, quality growth stocks have been richly priced, if not overvalued, and the rise in bond yields has hurt them more than cheaper value stocks. Some of the froth that has been seen in tech stocks has also waned.

There has also been growing expectation that there is light at the end of the tunnel as far as Covid-19 is concerned in some parts of the world such as the UK, US and China, which have been a lot faster at vaccinating their citizens. This has seen a switch into domestically-focused, economically-sensitive and cheaper shares. 

How long this current trend will continue for is anyone’s guess. My concern is that once value stocks have been revalued and profits have recovered, where do they go if they don’t have sustainable earnings growth?

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