Inflation is set to climb near 5% by year-end thanks to base effects, said Arnott, which will be a tailwind for cheap shares that have been neglected all year as investors dove headlong back into Big Tech stocks.
A longtime factor investor, Arnott has preached the value trade through thick and thin. But lately, his message has started to resonate as 10-year bond yields surge past 4.5% for the first time since 2007. A strategy that goes long cheap stocks and short the opposite is set for its best month in nearly a year, a Bloomberg index shows.
In his view, the catalyst for a reversal could be anything from resurgent inflation to rising rates and recessionary fears. Any of these tailwinds are likely to boost the appeal of value shares, which offer the safety of near-term cash flows and modest valuations. To him, consumer prices are set to rise at a faster pace as they will now be compared to a lower base in the second half of 2022. Demand is also getting a boost from employees working from home, which is helping them save money for discretionary spending like vacations.