Value stocks

Value stocks protect investors from the worst market storm of 2022

Value stocks offer investors shelter from the storm sweeping the markets, as portfolio managers hunt for bargains and shed high-flying companies that have been in vogue since the wake of the financial crisis.

The MSCI World Value Index fell around 7% in 2022 on a total return basis, much better than the 25% drop in the index provider’s Growth Index.

High relative returns mean that an investment strategy in which traders buy stocks of global companies that are cheap relative to metrics such as book value and earnings, and bet against expensive groups, has generated returns of nearly 30% so far this year. , according to data from Bloomberg.

The renaissance began more than a year ago, but the sharp rise in the so-called value factor in 2022 has reinforced the belief that this is now a lasting change in market conditions.

“There’s a regime shift afoot,” said Yoram Lustig, head of multi-asset solutions for Europe and Latin America at US asset manager T Rowe Price.

Growth investing dominated as central banks unleashed successive rounds of stimulus to support the global economy against the financial crisis in 2008 and the coronavirus crisis in 2020. The measures, including fixing rates interest rates at historically low levels, have contributed to inflating company prices. does not expect to achieve maximum profits in the coming years.

Value investors, on the other hand, struggled over the period as their performance lagged.

“We survived the worst decade in value history and are now enjoying the fruits of the rebound,” says Rob Arnott, founder and president of Research Affiliates, a consultancy.

Nick Kirrage, co-head of the global value team at London-based asset manager Schroders, said growth stock valuations had become so stretched that a possible reversal was inevitable.

“Valuation is a bit like a big rubber band. You can stretch it so far, then it comes back. Valuations cannot rise indefinitely, they tend to return to a median over time. »

Analysis from quantitative investment firm AQR shows that the value gap – which is the dispersion between the valuation of growth and value stocks – is still nearly as stretched by historical standards as it was. during the peak of the Internet bubble in 2000.

“This is a huge pricing error,” said Cliff Asness, founder of AQR Capital Management. “I believe the ridiculous spreads we’re seeing mean the value is going to make a lot of money over the next three plus years.”

Asness said AQR nevertheless warned clients that there were still likely to be resurgences in growth stocks along the way. ” Stay with [the value bet] when it’s incredibly painful is the source of overperformance. But we don’t think it will go completely crazy again.

Line graph of the value gap (z-score) showing growth valuations are well above historical norms relative to value

Vanguard expects US value stocks to offer annualized returns of 4.1% over the next 10 years, compared to just 0.1% for US growth stocks.

And a shift in sentiment is beginning to seep into exchange-traded fund flows among U.S. investors. Growth-oriented ETFs listed in the United States recorded net outflows of $2 billion in the first four months of 2022, partially offsetting the positive inflows of $38.2 billion seen across the entire world. last year, according to State Street data.

Meanwhile, U.S.-listed value ETFs garnered net inflows of $37.6 billion in the first four months of the year, following net inflows of $60.3 billion in 2021, said State Street.

Despite this rotation, the vast majority of investors – many of whom have become conditioned to “buy the dip” in recent years – are still considering increasing their exposure to value stocks, said Richard Halle, portfolio manager at M&G Investments.

“It’s emotionally difficult to act when growth stocks have been doing so well for so long,” he added. “Previous rallies in value stocks since the financial crisis have been brief and have actually proven to be a signal to double down on growth stock bets.”

Guy Spier, managing director of Zurich-based Aquamarine Capital, said the current inflationary environment means investors favor companies showing real earnings today, rather than valuing some of the more imaginative metrics by which they looked at growing businesses, such as total addressable market, unit economics, net income that excludes stock compensation costs, or even – in the case of WeWork – community-adjusted earnings before interest, taxes, depreciation and depreciation.

“Money suddenly becomes expensive and with higher interest rates people care what a business earns. What a concept!”

For many diehard value investors, the dominance of growth over the past decade has presented an existential challenge. Spier said, “Growth investors looked at people like me and thought, oh poor soul, you idiot, you just don’t understand how the world has changed.”

Now, with signs of a broad change in the markets, Spier said: “I feel a certain amount of schadenfreude – it’s like, what the hell were you thinking?” But the justification is ‘bittersweet’, he said: ‘I would like to put a lot more money in the market, but instead my investors are also nervous, my investors also want to take money out of the market. ‘money.”