Economic strength and rising inflation to favor value and cyclical stocks – Morgan Stanley

Growth stocks’ recent outperformance has investors wondering whether the long-awaited value comeback has already faded – some key trends suggest otherwise, according to Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley.

An ongoing comeback for value stocks

“If long-term rates move back up, growth stocks could come under pressure because the value placed on their future earnings and dividend streams would be more heavily discounted in equity pricing models. And, while technical factors may keep rates low in the near-term, we think they’re headed back up.”

“Our call for higher rates and a steeper interest-rate curve over the next 12 to 18 months is based on an optimistic outlook for capital spending, a strong housing market, which has multiplier effects for economic growth, and inflation from higher wages and rents. We believe growth in this business cycle will be faster and broader, fueled in part by fiscal stimulus, improving demographics as millennials approach higher-spending years, and a resumption of credit growth.”

“As rates move up amid expectations for accelerating growth and inflation, many investors tend to become more quality- and value-conscious, while simultaneously growing more averse to rate-sensitive holdings. We recommend adding exposure to the large-cap financials sector.”