December 2018
It is almost a decade since value investing was in the ascendancy, yet the past couple of months have seen a snap-back for the strategy. Can it last?
- An environment of lacklustre growth has made companies that can grow their earnings extremely valuable.
- Higher long-term bond yields and a perception of higher risk has seen ‘growth’ names sell off
- It should be a better time for value investing
One fund manager recently commented “I personally think that value stocks look attractive, although I have believed this for some time and I have been consistently wrong.” His views echo the exasperation of many investors, who look on as the markets seem to miss glaring value in certain parts of the market, while in hot pursuit of sexier growth names.
There are many reasons for this pursuit of ‘growth’ names: in particular, an environment of lacklustre growth has made companies that can grow their earnings extremely valuable. Quantitative easing has also played a role. However, it is difficult to say that growth is lacklustre in the US today, and loose monetary policy has been winding down for some time.
Yet this growth bias among investors has only started to unwind since October, albeit quite dramatically. The question is whether it can persist into 2019, and whether asset allocators should be adjusting their portfolios.
The big debate has been on whether ‘it’s all different this time’, whether disruptive companies are now so disruptive and so destructive of other companies that hunting around among unloved areas is more fraught with danger than it once was. Why waste time and energy trying to identify stocks that are 20-30% undervalued when technology companies have so much potential growth on offer?
Nevertheless, value has a strong academic pedigree as an approach and value-focused managers believe a meaningful gap has opened up with growth stocks, to an extent not seen since the technology bubble of 1999. As Invesco’s Mark Barnett said in a recent interview, “dig a little deeper and it becomes clear that domestically-focused stocks have moved into deep oversold territory, with banks, insurers, retailers, property and leisure companies trading at a 20 per cent discount or more to the rest of the UK market. This is where the opportunity lies.”
Bond yields are playing a role in this reversal. Long-dated bonds have risen and the yield curve flattened. A higher 10-year bond yield reduces the value of future cash flows. This hits equities, but also those with the strongest cash flows, notably the technology sector.
It should be a better time for value investing and there are signs that a decade-long trend is reversing. Inevitably when investors start believing that it might be all different this time, it proves not to be and growth stocks have had a long time in the sun. There again, markets have proved capricious places in 2018, so neutrality is perhaps a better approach.
