European markets lagged their US counterparts in June, especially the “growth” and technology-heavy NASDAQ, as fears of peak purchasing managers’ index (PMI) data, peak money-creation and peak inflationary-impulse stalled the so-called ‘reflation trade’. Even the mid-month concession by the US Federal Reserve (Fed), that inflation is indeed running ahead of expectations and an interest rate increase may well be warranted sooner than previously communicated, could only briefly arrest the decline of the US 10-year Treasury yield – an instrument which has assumed bellwether status with respect to market shape (such as growth versus value). It may well be the case – at least for the second half of the year while the market awaits greater clarity on COVID-19 vaccine success, the impact of the Delta variant and the strength of consumer appetite beyond COVID – that the easy wins of the “reflation trade” have been made. But, with authorities in most major regions signalling a strongly pro-fiscal stance, household finances robust, creeping wage inflation and the likelihood of medium-term commodity strength (such as metals needed for electrification), it would be premature to argue that the market’s brief flirtation with cyclicals and other assorted “value” is at an end and that an inevitable return to the pre-COVID, post-financial crisis paradigm of low rates, fiscal austerity, low inflation and clear growth/technology leadership is looming. As such, we think stock or sector-specific idiosyncrasy is likely to play a greater role in markets.

Our activity during June reflects our view above. We reduced our semiconductor exposure as hints of double ordering – usually indicating that a peak in the inventory cycle is approaching – started to emerge. We initiated a position in Danone, a long-time laggard among consumer staples, as a highly regarded external CEO appointment was made with a remit to turn the business around after years of strategic confusion. We boosted our exposure to “big pharma” following a period of chronic underperformance.

Cyclical stocks Expand

A cyclical stock is a stock that’s price is affected by macroeconomic or systematic changes in the overall economy. Cyclical stocks are known for following the cycles of an economy through expansion, peak, recession, and recovery.

Fiscal stimulus Expand

Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.

Growth investing Expand

Growth investors search for companies they believe have strong growth potential. Their earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore there is an expectation that their share prices will increase in value.

Inflation Expand

The rate at which the prices of goods and services are rising in an economy. The CPI and RPI are two common measures.

Monetary stimulus Expand

The policies of a central bank aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money. See also fiscal policy.

Reflation Expand

Government policies intended to stimulate an economy and promote inflation.

Undervalued Expand

Undervalued is a financial term referring to a security or other type of investment that is selling in the market for a price presumed to be below the investment’s true intrinsic value.

Value Investing Expand

Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase. One of the favoured techniques is to buy companies with low price to earnings (P/E) ratios. See also growth investing.

Wage inflation Expand

Wage inflation is an increase in nominal wages, meaning workers receive higher pay. Wage inflation tends to cause price inflation and higher growth. The impact of wage inflation depends on whether it is a real increase (higher than inflation) or just nominal increase (same wage increase as inflation). The effect also depends on labour productivity.

Yield Expand

The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisor, or its employees, may have a position mentioned in the securities mentioned in the report.