These have not been good years to be a value manager. One manager recently suggested that an annual meeting of value managers had become more like group therapy than an investment conference. There have been dark suggestions that the value style is dead, with technology ensuring that there is no reversion to the mean – companies go down and stay down.
Or is it just the reality of today’s environment? Falling bond yields have made ‘bond proxy’ sectors very attractive, while investors have been willing to pay up for growth in a low growth environment. These twin factors have driven the growth of certain favoured sectors. At the same time, more ‘value’-focused options, such as banks or utilities, have experienced ongoing, structural problems.
The question is whether this changes as the monetary policy environment changes. Many of the factors that have driven the strong performance of growth stocks are reversing. Interest rates are rising, inflation is slowly picking up. The US 10-year treasury yield, for example, is now edging towards 3%, having been as low as 2% in mid-2017. This means risk averse investors no longer have to look to the equity market for income.
At the same time, global growth is expanding. The IMF has recently upgraded its forecasts to 3.9%, with US tax cuts and Chinese economic growth driving the world economy higher. Globally, companies are operating in an increasingly benign environment. Investors no longer have to pay high prices for growth stocks when growth is abundant.
This changing environment has started to be reflected in stronger performance from value stocks. Commodity prices have recovered, and this has been seen in better performance from mining companies. At the same time, areas such as banks have also started to do better.
However, we have been here before. Rallies in value have often come to look like a ‘dead cat bounce’. There is plenty to suggest that the environment could fall back. Certainly, this is what the flattening yield curve would seem to imply.
In this environment, it may be a better hedge to go for ‘value-lite’ managers – those managers who have managed to hold their ground in difficult conditions for the value style – rather than the purists. It should be a better environment for value, but there remain considerable uncertainties.