Macro backdrop: US GDP is likely to grow by 8%+ this year, European PMIs could rise further (to the high 60s), and we think US 10-year yields will rise to 2% with the Bund yield rising to 20bps in the next 12 months; critically we expect this to be led by inflation expectations rather than real yields. We continue to believe inflation expectations will rise to 3% next year – see Real bond yields to stay low, but inflation expectations to rise further, 29 April.

We stick to our overweight of European value, a position we have held since mid-May 2020 (since then, European value has outperformed growth by c4%). Macro: Value versus growth in Europe is very closely correlated with the Bund yield, which we expect to head higher; when inflation expectations rise, value tends to outperform. Half the time value peaks after the peak in PMIs (by up to 10 months). Earnings: When earnings revisions for the market are positive and rising, value outperforms. Furthermore, earnings revisions of value are better than those of growth. Valuation: Value looks particularly cheap on P/E and P/B relative to growth. Performance: Historically, value has outperformed by 20% on average over 16 months (outperforming by 11% thus far since the October 2020 trough, but valuations and the strength of the current upturn suggest this should be a larger-than-normal value rally. Value is normally pro-cyclical, but we find an extreme gap between value and cyclicality (with value underperforming cyclicality).

What looks attractive? We focus on cheap, non-technically disrupted value that is correlated to higher inflation expectations and helped by policy. This would highlight aggregates/cement, containerboard, tyres, and mining (although we trimmed our weighting in mining in March owing to China concerns). We are also overweight some areas of technically disrupted value (particularly banks). Our analysts’ preferred names include CRH and Santander. Deep value names include Adecco and Smiths Group.

Our view that the TIPS yield will not rise by much suggests opportunities in less expensive growth. We would highlight alcoholic beverages (Diageo), testing companies (Bureau Veritas), industrial gases (Air Products, Air Liquide) and semis (TSMC, SEC).

In the US: We stay benchmark growth (having reduced our weighting in March 2021 after maintaining an overweight for almost a decade). This is because US growth is very closely correlated to the TIPS yield and the relationship with bond yields is less clear-cut (57% of the time they rise, growth outperforms). We continue to believe the cost of equity will fall (which also supports growth) at a time of extreme technical disruption. What stops us from going overweight growth is valuation (the P/E of growth is 52x and has hit the ‘danger zone’ of previous growth bubbles, which has been a P/E of 45x to 72x), a rise in inflation expectations and abnormally strong earnings revisions for value relative to growth. Some high-quality growth names include Alphabet and Danaher.

We are overweight value in Asia: Moves with European value, looks inexpensive, and benefits from higher US bond yields. We highlight Haitian International and Midea.