Something of value ...

The value style has endured a long period of underperformance across global equities that began just before the global financial crisis.

Schroders says between start-2007 and end-2017 the annualised underperformance of value relative to US growth has been 1.5%.

Growth delivers

“The most recent 11 years have been pretty woeful for value,” says Tom Mann at Schroders.

Over this period the world saw very low inflation and interest rates, depressed yields on government bonds, and central banks resorting to quantitative easing.

“Growth has been scarce, and when something gets scarce its price gets bid up. That’s been the case with the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google (Alphabet). They are rare growth assets that have been bid up because of the lack of growth.”

Defensive equities that pay consistent dividends have also been in favour. Bond yields have been so low that investors moved into these shares that have been paying more than fixed income instruments.

The macro picture

Investors should, however, consider how this environment is changing. Schroders’ Azad Zangana argues the global economy is moving into a new, expansionary phase, with clear signals that inflation is picking up.

The US Fed has started raising interest rates, creating a very different picture for investors.

“You can clearly identify periods in the economic cycle where you should be buying value over growth and I believe we are approaching that kind of period.”

Growth stocks are no longer so precious, since good company earnings growth is becoming the norm.

Catalysts for change

Mann believes there are catalysts that’ll see value again outperforming.

“The first is that growth companies potentially start to miss their earnings expectations.”

The second would be that value stocks start to beat market expectations for earnings. This would see their prices rerating.

The third is a rise in corporate activity via mergers and acquisitions.