The recent return to value looks different compared with similar situations over the past decade, fueling optimism among value investors that it could be the start of a sustained value rally.
“We do think it is different this time,” said Richard Halle, fund manager, M&G Investments. “The potential for value to do very well from here is enormous, in our view.”
The firm sees several good reasons why value is here to stay for the time being.
Reversing the trend
First, the preference among market participants for growth and quality stocks has become well-embedded and self-reinforcing. This has made a return to value even more of a challenge, as well as fleeting.
The past decade has even resulted in any value rally signalling a good opportunity to double-up on growth.
However, Halle said it is not the case this time. “The rotation to value has been both violent and prolonged. Growth investors are nursing very significant losses, particularly those who came in late to the party, but in many cases those who came in pre-Covid have also suffered.”
Dispersion in valuations
Second, the starting point for this rotation followed a remarkable surge in growth and quality stocks amid Covid.
The upshot was an extreme level of valuation dispersion. “On many measures, readings were in the 100th percentile for as far back as most commentators could find the data,” added Halle.
A new world order
Finally, the longer-term potential for value is partly based on the fact that several powerful long-running trends which have been headwinds for value to date seem to be reversing.
While factors such as increasing globalisation, ever-declining interest rates, central bank dominance, large scale credit creation, unprecedented money printing and deflation have all driven extreme valuation dispersion over the past decade, the next 10 years will likely look very different.
“If the world is going to change, we think very different stocks are going to do well and do badly,” said Halle. “This point is something we think is very much overlooked when thinking about the potential for future outperformance.”
At the same time, M&G believes that investors shouldn’t consider value stocks and growth stocks as two separate, but fixed, groups of stocks.
“As regimes change, a number of stocks which used to be value become the new ‘darling’ growth stocks,” explained Halle. “Conversely, a number of those growth stocks become the new value stocks.”
