Growth stocks are particularly sensitive to higher real bond yields. Falling real yields helped re-rate the MSCI AC World Growth index to a Price Earnings (PE) multiple of 31 times. Real yields at 0% would be consistent with the index trading back down towards 23 times.
The most vulnerable broad market indices will be those that have a heavier weighting towards Growth sectors and/or trade on higher multiples, such as the US and Emerging Markets including Taiwan, Korea and China. On a sector level, Global Information Technology, Consumer Discretionary and Communications Services are exposed.
The MSCI AC World Value index trades on 15 times, leaving it less vulnerable to rising real yields. Value-tilted sectors and regions should enjoy premium earnings-per-share growth as the global economy rebounds.
What this means for your portfolio
So with this information at hand, how should you go about reviewing and rebalancing your portfolio?
The first step is to work out whether your investment objectives and strategy are still relevant to your personal situation and circumstances. It is also important to establish how much risk you are comfortable with, while recognising that failing to accept some degree of risk can limit your investment’s potential growth and return.
Next, determine whether your portfolio is appropriately diversified across asset classes, geographies and industry sectors.
Is your portfolio weighted too heavily in growth? Should you consider switching into cyclical value stocks? You might gain exposure to value through a range of investments such as direct equities, Listed Investment Companies or trusts, or ETFs.
The consensus view is that value investing will continue to outperform growth investing while bond yields rise.
Watch US 10-year real yields – if they fall backwards, growth stocks may outperform again.
Investors should also keep an eye on the success of the COVID-19 vaccine roll-out as it will largely shape financial markets in the near future.