Can value keep winning?
Value stocks have been on the comeback trail since 2021. Is this a flash in the pan or a lasting trend?
Here at MoneyWeek, we’ve long believed that one of the most important factors driving long-term returns is the price you pay in the first place. Buy an asset when it’s cheap and you can expect to get better returns than when an asset is expensive. This explains our mild bias towards “value” stocks (those that look cheap based on various “fundamental” valuation ratios such as price/ book value – see below), as opposed to “growth” stocks (those that look expensive on most measures, but promise rampant growth well into the future – as long as everything works out).
It’s no secret that the past decade or so has been brutal for value investors. In the lowinterest rate, money-printing era that followed the great financial crisis in 2008, growth stocks outperformed value to an extent not seen except during the dotcom bubble of the late 1990s. But now that interest rates and inflation are rising, value investors are enjoying their day in the sun.
For example, Cliff Asness of investment group AQR moved his funds towards favouring global value stocks in November 2019. This turned out to be unlucky timing as the pandemic initially favoured growth stocks. But it has served him extremely well more recently. In the four months to the end of April, the flagship Absolute Return fund is up nearly 30%, which came on top of a gain of nearly 17% in 2021, notes Robin Wigglesworth of FT Alphaville. This comes at a time when wider markets have fallen hard, with once-popular growth-focused funds such as the ARK Innovation exchange-traded fund or the Tiger Global hedge fund hit even harder.
Where are we now?
The question is: can this continue? In terms of relative valuations, in a brief update last week Asness pointed out that value stocks are still almost as cheap relative to growth stocks as they were at the peak of the dotcom bubble in 2000. So on that front, there is little doubt that value remains far cheaper than growth.
Meanwhile, it’s hard to see the macroeconomic backdrop shifting back to a more growth-friendly regime. Inflation remains extremely high. Even if central banks lose their nerve on raising interest rates, stubbornly high inflation implies that investors should be keener to get their money sooner, which in turn shifts their focus to value over growth.
This doesn’t mean you can invest in “value” indiscriminately. Value might have outperformed growth, but the MSCI Value index is still down for the year. However, it does suggest that the broader shift away from expensive growth-dominated markets (such as the US, for example) towards cheaper markets with “old world” stocks (such as the FTSE 100) still has legs.
“Value stocks are still cheap relative to their growth counterparts”