(Bloomberg) -- Investors should be prepared for the possibility that the economy and markets might recover quicker than is currently priced in, according to Credit Suisse (SIX:CSGN) Group AG.
Value stocks, which tend to track economic cycles more than their growth counterparts, have started to shine after long periods of underperformance. Last week the Russell 1000 Value Index beat the growth gauge by more than two percentage points, and bested it the week before as well. While there’s debate about how quickly economies can recover from the pandemic, equity-derivatives strategist Mandy Xu said it’s worth building in that possibility.
“For value to outperform sustainably, we need to see a significant pickup in economic growth -– which, in the current environment, means believing in more of a ‘V’ shaped recovery than is currently priced in,” Xu wrote in a note Monday. “We think it’s worthwhile hedging this right-tail risk, especially in light of the still cautious investor positioning.”
While a rotation to value stocks from growth has been predicted by strategists many times, the recent outperformance has revived those forecasts. It isn’t clear that the trend can be sustained -- Societe Generale (OTC:SCGLY) SA said it’s skeptical of the equity rally due to the “wobbly” performance of cyclically-oriented shares. Credit Suisse says there’s enough of a chance and it’s worth being prepared.
Xu recommends buying call-option spreads in the Financial Select Sector SPDR Fund, which has been an underperformer so far this year. Bullish option activity has started to pick up in that exchange-traded fund in recent weeks, she said.
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