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Inflation flare-up: Which value stocks to buy for the recovery and rotation

With worries about inflation flaring up around the world, investors have been turning to ‘value’ stocks that they expect to do better from the economic recovery and benefit from the rotation out of more cyclical sectors.

This trade has seen plenty of activity in recent weeks but value stocks still have the potential to rise further, according to broker Liberum, especially if inflation really gets a grip on investors’ thinking in the second half of 2021.

Global markets have been wobbling this week on the back of renewed worries about rising prices and Liberum is not the only one to believe that growth stocks and mega-caps are still vulnerable if inflation fears do take hold.

The broker argues a soft patch is coming up with underperformance likely in these growth stocks, especially global tech mega-caps.

Summer will be the make or break in determining how long this lasts, Liberum adds, with US Treasury bond yields of 3% and ten-year gilts at 2.2% the triggers.

If bond yields top out at the upper end of these ranges, growth and the mega-cap techs should stage a comeback in the second half of 2021.

A sustained break above those yield limits, however, and Liberum sees ‘inflation expectations getting out of hand’ and value extending its outperformance.

For that reason, Liberum suggests value and small-cap stocks should continue to outperform in the short-term and “If inflation expectations and bond yields overshoot in the summer, we would expect small-cap and value outperformance to extend well into the second half of this year”.

The broker has added two stocks to its portfolio to replace companies that have hit its price target: Drinks maker AG Barr PLC (LON:BAG) makes it in the low beta category, joining the likes of BATM Advanced (LON:BVC), Bloomsbury Publishing (LON:BMY), IG Group (LON:IGG), Aptitude Software (LON:APTD), Pennon (LON:PNN), Croda International (LON:CRDA), Softcat Group (LON:SCT), Spirax-Sarco (LON:SPX), FDM Group (LON:FDM), Howden Joinery Group (LON:HWDN), Games Workshop (LON:GMW), Persimmon (LON@PSN) and Bellway (LON:BWY), plus Liberum corporate clients including Plus500 (LON:PLUS), SThree (LON:STEM) and 4Imprint (LON:FOUR).

Outsourcer Serco PLC (LON:SRP) joins the quality with a value tilt portfolio, joining the likes of Sirius Real Estate (LON:SRE), ITV (LON:ITV), IMI (LON:IMI), Howden, XP Power (LON:XPP), Electrocomponents (LON:ECM), Croda, Halfords (LON:HFRD), CRH (LON:CRH) and Anglo American (LON:AAL).

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