Stocktake: Reflation trade may be dormant, not dead

Last week was a troubled one for global markets. Stocks went south amid talk of Covid-19 variants, a global growth scare and plunging bond yields.

The pain was not equally distributed. Since last autumn, value stocks have outperformed their growth counterparts but that trend suffered a serious reversal in June, when growth outperformed value by the most in 20 years.

We saw more of the same last week. When growth is scarce, investors flock to stocks such as Apple, which last week registered its first closing high since January. In contrast, cheap cyclical stocks dependent on renewed economic growth were hit badly.

So is the reflation trade dead? Not necessarily. Influential Allianz economist Mohamed El-Erian argues last week's turbulence was driven by technicals rather than fundamentals, with some investors simply "caught offside in a big way".

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Crucially, value stocks are still in an uptrend relative to growth, notes SentimenTrader's Jason Goepfert. Large counter-trend monthly losses typically result in the trend reasserting itself; since 1950, the value/growth ratio rebounded on all but one occasion over the following three to 12 months.

In other words, the recent value-growth reversal is likely to be temporary – good news for investors who thought they had missed their chance to buy value stocks.