Historical numbers, valuations, and anticipated economic shift all point to comeback against growth
While the value approach to investing has been a heavy underperformer in recent years, the economic and financial-market upheaval caused by the coronavirus has sparked questions about whether value can best growth in the new normal.
To Stephen Way, senior vice-president and head of Global and Emerging Markets Equities at AGF Investments, it’s not necessarily value’s moment – but there could be a movement under way.
“[T]he current divergence in favour of growth, particularly in the U.S., has now reached an extreme that seems unsustainable and could soon result in value having the next leg up,” he said in a recent blog post.
Way noted that there have been only two other periods in modern history when value underperformed growth to the same extent: in early 2000 just prior to the dot-com bubble burst, and the end of the 1930s following the Great Depression. In both instances, a multi-year stretch of value outperformance followed.
He also flagged the “dizzying level” of valuations enjoyed by growth stocks, both relative to value stocks and on an absolute basis. In the U.S., he observed, growth valuations are being fuelled by the handful of tech giants dominating the S&P 500 on a market-cap basis, which have handily outperformed the remaining constituents of the index based on Bloomberg data.
“In some cases, however, these top tech names are now trading at almost double their long-term averages and the likelihood of them continuing to outperform may be severely diminished going forward,” Way said.
He also pointed to a possible lift for value stocks coming from a turn in Purchasing Manager Indices (PMIs), which are plumbing all-time lows in many countries. With a partial reopening of the global economy, PMIs are expected to undergo an upward inflection in the second half of 2020, supporting increased economic activity and modestly higher interest rate and potentially catalyzing the beginning of more sustainable outperformance of value over growth.
The past couple of weeks have seen financial and energy sectors gaining from the gradual reopening of the U.S. economy, he said, leading to significant outperformance of value over growth.
