Don’t Expect a Sharp Shift to Value Just Yet

With the coronavirus showing its tangible effects on the announcement of Apple struggling to meet its revenue projections for the fiscal second quarter due to weakened sales in China, a sharp shift to value investing might be expected. However, market experts caution investors to wait until we see the full scope of the coronavirus effects.

“In the short term, we suspect that the hit to Chinese GDP could be significantly larger than consensus expects, but we believe this is a postponement, not a cancellation, of a global recovery and that the policy response should make up for most of the growth shortfall,” said Strategists at Credit Suisse. “We think weak data will be dismissed as temporary (barring a sustained rise in corporate defaults, which looks unlikely to us).”

For now, investors are wondering whether growth prospects remain strong as they extended bull rally continues to march forward after the markets shake themselves from coronavirus news.

“While the combination of low inflation risk, solid growth outlook, and high earnings yields lasts, equities will continue to march higher,” said Evercore ISI strategist Dennis DeBusschere. “The appetite for deflation hedging and the global savings glut is likely anchoring term premiums, [and]it is hard to predict when that dynamic will reverse.”

“For now though, we will wait for evidence of a calming of Covid [coronavirus]fears before suggesting investors position for a sharp factor reversal,” he added.

Will a mass movement away from growth into more quality, safe investments be on the way? From a relative value ETF standpoint, this could put value over growth equities and defensive over cyclical equities in play—particularly, the  Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG) and the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC).

RWVG seeks investment results that track the Russell 1000® Value/Growth 150/50 Net Spread Index. The fund, under normal circumstances, invests at least 80% of its net assets in securities that comprise the Long Component of the index or shares of ETFs on the Long Component of the index.

RWGV measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Value Index (the “Long Component”) and 50% short exposure to the Russell 1000® Growth Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value.

RWDC provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors. RWDC tilts towards defensive sectors like health care and consumer staples as shown in the fund’s breakdown. Conversely, it shorts names like the top technology giants that skew towards momentum.

For more relative market trends, visit our Relative Value Channel.