During his recent interview on The Acquirers Podcast with Tobias, Vincent Deluard, Director – Global Macro Strategy at StoneX Group Inc discussed Inflation Is Good News For Value Investors. Here’s an excerpt from the interview:
Tobias: What about from a factor perspective? You took a pretty close look at that, and I thought there were some interesting outcomes from that.
Vincent: Yeah. The one that works best during the inflationary period is value, which at that– [crosstalk]
Tobias: Yeah. I’m happy to hear that. That’s why I raised it. [laughs]
Vincent: [laughs] Yeah, you need all the love you can.
Tobias: That’s it.
Vincent: Oh, yeah. I think it’s going back to the duration argument, ultimately. If you thought of duration of stock like you would of a bond, value stocks are low duration. They’re low duration, because the high dividend yield means you get your capital back faster. It’s like the duration of the one with high coupon is lower than that with a bulk bond. So, same thing.
Then, also some of that value is immediately realized, because you’re getting a low price to book, so the assets, right away, you’re getting a claim on real assets that you can cash today. As opposed to growth stocks, where the cash flows are going to come far out in the future, and then even the assets, which most often are intangible will only materialize their value later. So, when REITs go lower and then yield curves flatten, that helps growth. Conversely, when you have inflation, steeper yield curves and higher rates, that helps value. I think that’s the reason why you see the value anomaly.
By the way, I’m not sure about the term ‘anomaly.’ If you look at the Fama/French data, most of the returns from the value factors came from these short periods of inflation, the 1970s and the early 2000s. I will not say that it’s anomalies, just a normal ebb and flow, inflation favors value, deflation favors growth. We came from 40 years of deflation. Now, we’re switching and I think that’s why you’re going to see value do better.
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