Will US inflation revive value stocks? Conglomerates are finally dying

The last time we had nominal yields on the rise was from early November 2020 to April 2021, it caused a rally in global value stocks outperforming global growth stocks by 18% before giving up most of the gains as growth stocks resumed their rally. If we are right on inflation and the response in yields, then energy, financials, and mining companies will drive the outperformance in value stocks. From a tactical point of view it is worth playing. Long-term our view is still that investors should have exposure to the commodity sector, cyber security, semiconductors, India, logistics, and mega caps.

Could the anti-conglomerate thinking come to technology?

The move by General Electric to break up the conglomerate into three separate companies follows a successful divestment strategy of Siemens, although we would argue that Siemens could be simplified even more. The two most iconic industrial conglomerates have finally caught up by the times and especially the evolution of investment theory on portfolio management. Nowadays, investors want pure plays on industries and technologies, just look at how Tesla is being rewarded by investors for being the only meaningful pure play on the future of electric vehicles. In the short-term it does not look like investors are impressed about the GE plan in which the debt split is one of the key outstanding issues. However, longer term it is the right decision and more companies should look hard at their businesses and consider whether there are any synergies between. If not, simplify the business.

The bigger question is whether the push to divest businesses that have no obvious synergies will come to technology companies as well. They have long been shielded from these pressures as they have most concentrated on the old industrials that embraced the conglomerate philosophy in the 1960s. Amazon is an interesting case where the synergy between the cloud business (AWS) and the e-commerce business is quite low. In 2020, the AWS business generated $13.5bn in operating income compared to $9.4bn for the combined e-commerce business. The cloud business comes with much higher operating margin and less CAPEX needed to drive incremental revenue, so investor demand would be extremely high for a pure play on the world’s largest cloud business. Maybe GE will be an inspiration for Amazon?