Value With Momentum — according to Feifei Li (Head of Equities, Research Affiliates)
Value stocks are translated into momentum stocks in recent times as the vaccine rollout had fuelled a new prospect of growth that favors stocks that are value-oriented.
Value investing refers to buying stocks that are valued cheaper relative to their fundamentals. On a quantitative investing basis, the factors of value and momentum are negatively correlated over the long term. However, when the factors converge and move in together, it can translate to a very bullish signal. The recent pull-back in value stocks has seen the current price multiple moved off its historical low but remain much below its historical average.
Therefore, it’s expected to see stocks’ valuations revert to the mean over the long term. Moreover, value stocks and cyclical sectors are set to benefit significantly from further economic recovery expected across the globe in the next 6-12 months. The recent pullback in some sectors with more exposure to the cyclical upside could be a great opportunity to cash in.
Large Pharma Players — according to Sarah Ketterer (Chief executive officer and fund manager)
Over the past 12 months, economically stable sectors including healthcare, utilities, and consumer staples have underperformed. In particular, the large-cap pharmaceuticals are trading at the lowest valuation relative to global markets in over 20 years. Historically, the sector is vulnerable to the political uncertainties around drug prices, as they have lately, before strong momentum returns. The pandemic has interrupted normal hospital admission, interrupted prescription filling, and weighed down on the industry revenue. Post pandemic should see a shift to telemedicine and more prescriptions to be filled.
Large pharmaceutical companies are spending on developing promising biotechnology research platforms with applications in oncology, immunology, and other disease areas. They have the potentials to outperform in the medium to long term, assuming these players can innovate, maintain pricing power, and reward shareholders with generous dividend payouts on new drug launches.
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