U.S. Equities: Does It Still Make Sense To Favor Growth Over Value?

Our U.S. equity strategists argue that the parabolic rise in the growth vs. value trade has run its course and is no longer sustainable.

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The bulk of our style Indicators shown in the chart above signal that macro conditions are still tilted in favor of growth. As a reminder, growth indexes almost always move to a premium when economic growth declines, as is currently the case.

Perhaps the most powerful tailwinds for the growth bias relate to the deflationary backdrop. Growth indices have a better track record than value indexes when pricing power is ebbing. Even then, our relative pricing power proxy is soaring, further reinforcing that growth stocks have a meaningful profit advantage.

Growth margins are consistently higher and have less cyclicality than those of value firms, underscoring that when overall sales are pressured, growth earnings should be more stable. The latter explains why the growth vs. value price ratio is positively correlated with broad market volatility. With the VIX index moving sharply higher, it is no wonder that the share price ratio has gone vertical.

Nonetheless, our U.S. equity strategists are losing conviction in the ability of growth stocks to sustainably outperform from current levels, despite our downbeat view of global economic growth prospects. Please see the next Insight, (Part II) U.S. Equities: Does It Still Make Sense To Favor Growth Over Value?

How To Play Fresh ECB Easing

The plunge in oil prices has raised the risks that the ECB will not hit its inflation target, even with European growth showing solid upside momentum. Additional ECB easing measures are likely in March. What are the best ways to play for additional ECB easing in European fixed income markets?

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Our global fixed income strategists don’t think increasing core duration exposure is the way to go. Longer-dated yields in Germany and France are already at very overvalued levels and the experience of the sharp German Bund selloff last April highlights the risks of extrapolating yields to zero, even during a QE program.

Putting on curve trades (like a bull flattener) in core Europe is also not advised, given how directional the yield curve has become with the overvalued level of yields. Inflation expectations should be expected to widen in the event of more ECB easing, but the path of CPI swap rates and inflation breakevens will still be determined by the trajectory of oil prices in the next few months, making inflation trades a risky bet.

We think that any new easing measures will most likely benefit Peripheral spreads the most – please see the next Insight, (Part II) How To Play Fresh ECB Easing?