Published On: June 8th, 2021|By |Categories: Market Updates, Value|2.2 min read|

There is building tension between the signals to be read into a consolidating U.S. 10-year yield and the continued positive performance of most risk assets. U.S. 10-year yields have been in a small trading range since their peak at 1.74% at the end of March and their current lows at 1.54%.

We have noted the failure of yields to continue higher despite the evidence of strong economic growth and above consensus inflation readings. However, as the table below shows, as bond yields have consolidated, risk assets dependent on economic growth have continued to trend higher – commodities, economic sensitive stocks, Banks, etc. At the same time, defensive equities – such as Utilities and Staples – are showing no signs of relative leadership that would usually warn of rising equity risk. We suspect that developments during the summer months will provide clearer evidence of which asset market is currently right.

Performance since peak in 10-year yields on 3/31/21 | Mpartners Vermogensbeheer

Source: Strategas Research Partners


There are multiple explanations for this building discrepancy. Those in the corner of lower expected yields and a return to pre-pandemic anemic growth do point to the fiscal cliff that the U.S. will face in 2022 – whatever the success of the Biden administration in pushing through current plans for infrastructure spending. Should Biden be successful in every policy proposed in his budget, the U.S. will still be facing at least an estimated $1.5 trillion fiscal tightening in 2022.

To put this in context, it would be the second largest fiscal contraction since WWII (charts below). This fiscal tightening would coincide with the expected start of a reduction in monetary stimulus – a potential lethal combination for growth and profits.

Fiscal Policy Stimulus | Blog Mpartners Vermogensbeheer

Source: Strategas Research Partners

Largest Reduction in US Federal Budget Deficit, % of GDP | Fiscal Policy Stimulus | Blog Mpartners Vermogensbeheer

Source: Strategas Research Partners

Equity investors do not currently seem to be concerned by this scenario. Equity inflows in 2021 have been extremely impressive and after five months are already ahead of inflows in every year since 2005, except one (graph below). This can be explained by a more optimistic view of the outlook for consumer spending and business investment which are recovering quickly and could compensate for the drag of fiscal retrenchment.

Cumalative Daily Equity ETF Flows | Largest Reduction in US Federal Budget Deficit, % of GDP | Fiscal Policy Stimulus | Blog Mpartners Vermogensbeheer

Source: Strategas Research Partners


Whatever the outcome of this tug-of-war, we suspect that the recent investor focus on realistic valuations will persist. Despite the strong recovery of previously neglected Value segments of the market, valuations remain highly compelling and suggestive of significant relative outperformance ahead. The outperformance journey for reasonably valued companies able to demonstrate a resilient business model has only just begun

MSCI AC World Value NTM P/E Relative to Growth NTM P/E

Source: Strategas Research Partners


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David Williams (1970) is verantwoordelijk voor het beleggingsbeleid van Mpartners. Na een korte carrière bij het Ministerie van Buitenlandse zaken van Barbados begon David in 1997 bij Insinger de Beaufort Asset Management en in 2002 werd hij director. Hier droeg hij verantwoordelijkheid voor het investment team en de beleggingsfondsen (zowel long-only als gehedgde portefeuilles). Zijn specialisatie is Europese aandelen. In 2010 heeft hij samen met de andere partners Mpartners opgericht. David Williams heeft een B.A (Honors) van de University of Kent, een M.Sc. in Internationale Politieke Economie van de London School of Economics en een MBA van Nijenrode.