1. The shift towards more cyclical and value leadership that dominated the period from the 2020 March low to the beginning of this year reflected a particularly strong inflection point in growth and inflation expectations following unprecedented policy support and progress on vaccinations. Given that there were record valuation spreads between growth and value parts of the market prior to this inflection point, the shift in confidence had a big impact on market leadership. As Exhibit 1 shows, our baskets of global cyclicals relative to defensives started to outperform on a year over year basis, moving very closely with changes in growth expectations (represented here as the global composite PMI). The recent fading of cyclical outperformance has also coincided with a peak in growth momentum on this metric but would appear to be reflecting an expectation that the global PMI slows to the low 50s. As Exhibit 2 shows, this is also true when we compare global value versus growth.
2. Another key driver of this rotation has been the shift in inflation expectations. As Exhibit 3 shows, the strong outperformance of the cyclical parts of the market also moved closely with inflation expectations which increased sharply in the first phase of the rotation, but has since moderated alongside the peak in growth momentum and also the shift in Fed dot plots.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
