Rob Arnott, the founder of Research Affiliates, believes that as the likelihood of a hard economic landing increases and inflation is poised to re-accelerate, it's an opportunity for investors to divest from expensive growth stocks in favor of value stocks.
Speaking to Bloomberg TV, Arnott pointed out that inflation is expected to approach 5% by the end of the year due to base effects. This anticipated inflationary trend could act as a tailwind for undervalued stocks that have been overlooked throughout the year, as many investors redirected their focus towards large technology companies.
“The illusion of tumbling inflation helped to fuel the surge in growth relative to value,” he said in an interview. “Now we’re experiencing the reverse of that.”
Rob Arnott, whose firm manages approximately $130 billion in assets, draws attention to the valuation spreads in the market. These spreads have widened again during the current year, primarily due to expectations of lower inflation and optimism surrounding artificial intelligence (AI), which has driven up the multiples of popular tech stocks.
Arnott highlights that in the past, when these valuation spreads reached similar levels in 2020 and 2021, there was subsequently a resurgence in value stocks.
This historical precedent suggests that the current conditions may be favorable for value-oriented investments, which tend to benefit when the valuation gap between growth and value stocks widens.
“It is wonderful for people who have enjoyed the growth run and been light on value to have a third chance to rebalance and take advantage of bargains,” he said before his television interview.
“You don’t often get that. So I look at the current environment as being a just near perfect environment for value.”