Cutting though equity style around Fed tapering?

Key Points: 

• In our previous note, we argued Fed tapering should not be feared by risk assets even though volatility is likely to increase. We have not changed our view and continue to run a modest overweight to risk assets, with a preference for Aussie equities over the US and Europe. Japan and EM are our least preferred equity market exposure.
• In the 2013 tapering event, regional selection rather than style was more important for global investors. The valuation premium for Growth over Value was steady both before and after tapering was announced. The equity market risk premium declined until tapering began.
• The starting point in 2021 is very different. Growth is significantly more expensive both relative to bonds and relative to Value. In our view, this leaves Growth vulnerable. Value, on the other hand, has similar valuation as it did prior to the 2013 announcement of tapering and should ride out the bumps in markets that lay ahead.
• In Australia, during 2013, the baton of outperformance was passed from Value to Growth after tapering was announced and it rode out the volatility in bond yields after the announcement. Banks, Insurance and Consumer services are all outperforming now as they did back in 2013. Of these sectors, only Consumer services managed to get through all phases of tapering in 2013 with outperformance. The other outperformers after the announcement to taper in 2013, were Healthcare equipment, Pharmacy & biotechnology, but they have all underperformed this year.
• Metals and Mining, Energy, Transportation, Capital Goods, Commercial & professional services and Utilities all underperformed thus far in 2021 and also underperformed in the lead up to tapering in 2013.
• The sectors to sell now and buy back after a rise in yields are Insurance and Telecommunication services, if 2013 is a good guide. They all outperformed in the lead up to the 2013 announcement and in the 12-month period after tapering began when yields were falling. They are also outperforming again in 2021.
• The other sectors to sell now are Banks, Food and staples, Food, Beverage & tobacco, and Retailing if the 2013 template plays out. They all underperformed during the volatility in bond yields after tapering was announced.
• Don’t be tempted to buy Energy and Capital goods. These sectors have underperformed thus far this year and also underperformed before, during and after the tapering announcement in 2013.