The easy part of the recovery trade may be over.

Global markets look to have reached a turning point in their rebound from pandemic lows. In previous phases there was an unusual cohesion of views around havens like gold and the stay-at-home trade, followed by bets on a value rotation and steepening yield curve. What comes next is much less clear.

Take the debate between value and growth. Societe Generale SA and JPMorgan Chase & Co. say value shares will keep outperforming at this stage of the market cycle. Prudential Financial Inc. and AlphaOmega Advisors LLC say the sector is due for a pullback. There is just as much as divergence over the fate of the dollar, and on the next move in Treasuries.

Much of the growing uncertainty stems from the pivotal point reached in the fight against the coronavirus. The rollout of vaccines is raising the prospect the pandemic will eventually be contained, but the fact that cases are rising in many countries still leaves plenty of room for things to go wrong. At the same time, there is concern the recovery will peter out once stimulus is withdrawn.

“The pent up demand will likely fuel the recovery of cyclical sectors that have been hurt the most by the pandemic, but that could prove be short-lived as stimulus fades and investors have to look beyond the recovery to the new post-pandemic world,” said Charlie Ripley, senior investment strategist at Allianz Investment Management based near Minneapolis. “The landscape could become difficult to navigate.”

U.S. President Joe Biden’s proposed $2.25 trillion infrastructure package may throw another wild card into the system, depending on exactly what spending and tax increases end up being implemented.

Value Versus Growth
By far the biggest debate among strategists is over the respective merits of value and growth. Value has been a tearaway winner this year as the recovery has gathered pace, with the Russell 1000 Value Index rising 11% since the end of 2020, while the same provider’s Growth Index has gained less than 1%. In recent weeks though this outperformance has shown signs of stalling.

SocGen sees further gains in value as just a matter of time. “Value (and more generally cyclicals) still command significant valuation advantage to the rest of the market,” said Solomon Tadesse, head of North American equity quant research in New York. “Distressed out-of-favor assets tend to gain from potential multiple expansion at this point of the market cycle.”

JPMorgan Chase is also staying positive, arguing value will benefit from rising interest rates and a steeper yield curve.

“Value remains an outsized beneficiary of reopening, which is still in its early stages,” strategists led by Dubravko Lakos-Bujas in New York wrote in a note Friday. Still, “while we believe value and reopening trade still has room for upside, we would emphasize focusing on higher quality companies with greater staying power, for example retail and energy.”

Prudential Financial has a completely different view.

The reflation trade is “frothy” and “waiting for a pullback is prudent,” said Quincy Krosby, chief market strategist at the insurer in Newark, New Jersey. Stocks have moved quickly to price in a potential U.S. infrastructure package and any signs of difficulty in getting the legislation passed could instigate a selloff, she said, adding that such a dip may offer a good entry point.

AlphaOmega Advisors is also losing its enthusiasm for value shares.

“It’s time to take money off the table now,” said Peter Cecchini, founder and chief strategist of the independent research and consulting firm in New York. “Perhaps the latest round of stimulus will keep the cyclicals trade alive a bit longer, but I just don’t see the cycle turning for good as we might expect after a normal recession,” he wrote in a research note Friday. “Staying tactical and nimble seems prudent.”

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