Entry Points | Charting the Correlation Between Inflation and Value

Rising rates, inflation, and value investing. Director of Portfolio Research John Forelli, CFA, discusses these trends and how they’re shaping up in 2022 in the latest Entry Points For questions or additional information, please contact us.

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Inflation, Rising Rates and the Return of the Value Cycle

Catalysts in Play: Marketwatchers for some time have been monitoring the inflationary backdrop to predict whether and when the Fed may adopt a more hawkish stance. As we near the end of the first quarter, it comes as no surprise that the Fed has indeed indicated it will be raising rates as early as March and begin selling bonds later this year. This shift in monetary policy adds a new dimension that should have widespread ramifications across the market and likely unseat many of the winners from the recent past. 

Entry Points: The shift, of course, is not unprecedented. To get a sense how these new dynamics may influence equities, history can provide some color. While 10-year bond yields have largely maintained a downward trajectory for over 40 years, prior to this prolonged stretch, value equities steadily outperformed growth from 1954 to 1981. The same scenario, from approximately 2002 to 2007, again played out as a rising yield environment again coincided with value outperformance.

Multiple Compression: As the cost of capital escalates, it becomes harder for investors to model growth out into the foreseeable future. A factor behind value’s outperformance during inflationary periods and eras marked by rising rates is the multiple compression that occurs parallel to rising costs. Going back to 1950, price-to-earnings multiples were at their highest when inflation ranged from zero to 2%, but contracted by nearly four turns – from 18.6x to 15x earnings – whenever inflation exceeded 4%. This tendency is already evident as 10-year bond yields have increased amid growing inflation expectations.

Evolving Appetites: Of course, some sectors tend to be more sensitive to rising rates and inflationary pressures. In particular, traditional growth industries such as technology and telecom have historically lagged areas of the economy associated with value, including financials, energy and industrials. As investors begin to discount future earnings, longer-duration equities tend to be more exposed as valuations are adjusted downward.

Active Strategy: As of March 2022, growth companies were trading at premiums ranging from 50% to 100% above historical median valuations dating back to 1982, based on capitalization and style. Value stocks, alternatively, were trading at a smaller 17% premium relative to history. Given that the inflationary cycle appears to be in the early innings, particularly as geopolitical tensions add new variables, Boston Partners active approach to value investing guided by an integrated investment process that can identify high-quality companies at attractive prices, while exhibiting positive business momentum — can deliver performance during periods of rising rates as well as across various economic and market environments.

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Boston Partners Global Investors, Inc. (“Boston Partners”) is an investment adviser registered with the SEC under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. The views expressed in this commentary reflect those of the author as of the date of this commentary. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Past performance is not an indication of future results. Discussions of securities, market returns, and trends are not intended to be a forecast of future events or returns.

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Matthew Donovan

Equity Analyst

Mr. Donovan holds a B.A. in Economics from the University of Pennsylvania.

Mr. Donovan is an equity analyst with Boston Partners. Mr. Donovan is focusing his analytical efforts on Emerging Markets equities. Prior to this, he was a Research Analyst for the Boston Partners Sustainability and Engagement Team. He was responsible for original ESG/Sustainability research on companies held in Boston Partners’ portfolios. Mr. Donovan holds a B.A. in Economics from the University of Pennsylvania. He has one year of experience.

John Zhao

Equity Analyst

Mr. Zhao holds a Bachelor of Arts degree from the Richard Ivey School of Business at Western University and an MBA from Harvard Business School. He has six years of industry experience.

Mr. Zhao is an emerging markets industry analyst with Boston Partners specializing in fundamental research of stocks held in our Emerging Markets Equity products. Prior to his role at Boston Partners, Mr. Zhao worked as a Private Equity Associate in Salt Lake City and an Investment Banking Associate in Hong Kong.

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Jonah Frank

Equity Analyst

Mr. Frank was a student at Boston University where he earned a B.S. degree in business administration with a concentration in finance and management information systems.

Mr. Frank is an equity research analyst with Boston Partners. Mr. Frank is focusing his analytical efforts on equities within a variety of cyclical industries.

Edward Stansky

Equity Analyst

Mr. Stansky holds a B.S. degree in economics from Duke University and a M.B.A. from NYU’s Stern School of Business. He has six years of investment experience.

Mr. Stansky is an equity research analyst with Boston Partners and has generalist coverage responsibilities. Prior to this role, he worked as a high yield and leveraged loan analyst at DDJ Capital and as an investment banking analyst in debt advisory at BofA Merrill Lynch.

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Marlon Thompson

Equity Trading Assistant

Mr. Thompson holds a B.S. degree in finance from Boston College. He has ten years of industry experience.

Mr. Thompson is an equity trading assistant for Boston Partners. Prior to assuming this role, he worked as a portfolio operations analyst. Before joining the firm, Mr. Thompson held several roles including Vice President of Operations at Benefit Street Partners LLC and positions at International Fund Services (IFS) and Pioneer Investments.

Kara Pattipati, CFA

Relationship Manager

Ms. Pattipati holds an M.A. in International Relations from the University of St. Andrews. She holds the Chartered Financial Analyst® designation. Ms. Pattipati has ten years of industry experience.

Ms. Pattipati is a member of the Relationship Management team at Boston Partners. She works with many of our key domestic and international clients in a client service and relationship manager capacity. Prior to joining Boston Partners in 2016, she was a business development associate at Geode Capital Management.

Elizabeth Sheerin

Relationship Manager

Ms. Sheerin holds a B.S. degree in business management from Babson College. Ms. Sheerin has thirteen years of industry experience

Ms. Sheerin is a member of the Relationship Management team at Boston Partners and she joined this team in 2011.  She works with many of our key domestic and international clients in a client service and relationship manager capacity. Prior to joining our firm, she was a Client Service Representative at Putnam Investments. She also held several financial services related internships including working for Merrill Lynch Global Wealth Management and State Street Global Advisors.

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