📝 Growth Factor Performance Looks Disconnected From Fundamentals: Barclays Strategy

US growth exceptionalism continues, but we are seeing signs of stabilization in Europe and China, too, which is helpful. Manufacturing is also showing signs of bottoming out, with new orders to inventories picking up as excess inventories built up over the post Covid supply chain issues are worked out of the system. But consumer strength has been key to the global economy avoiding recession, even as rates have been pushed from 0% or below to more than 5%.

We have seen a dramatic repricing higher in rates, particularly real rates, which have surged in recent months and now stand at about ~2.5%, up from ~1.5% only a few months ago. Given how sensitive valuations are to real rates, this has forced the valuation of more expensive parts of the market (and the market itself) lower. In factor space this has been most evident in the poor performance of more expensive styles like Growth and Quality, and better performance of cheaper styles like Value and Yield.

Part of the reason for this is that, despite Value sectors providing nearly all of the market's earnings growth over the last few years, investors are still not prepared to own Value given perceived cyclicality and earnings risk, if a recession were to eventuate. Strong relative earnings but poor relative performance means Value vs. Growth performance looks very disconnected from its fundamentals in our view, and helps inform our continued preference for Value.