News & Views

Is value investing making a comeback?15 June 2020

It is well known, and has been discussed, that value stocks have been underperforming growth stocks for 13 years. But markets, in the end, do revert to valuation averages. So, could we be seeing the start of that reversion now?

The outperformance of growth stocks since 2007 is a result of the lack of opportunities for expansion in the sluggish recovery that economies experienced post the financial crash. Low interest rates have helped growth stocks do relatively well as their potential for future growth has looked promising in a challenging environment.

The question isn’t whether growth stocks should be more highly valued than value stocks. The question is, has the divergence gone too far and for too long. The valuation gap between growth stocks and value stocks is as wide as it has been since 1904.

It could be argued that the divergence between growth stocks and value stocks can go on forever. If interest rates remain low and economic growth is going to be subdued for some time to come, then the more an investor is prepared to pay for growth potential, the less important it is for a return of cash in the form of dividends from their investment.

If you run data back to 1825, investing with a value approach has outperformed by around 3% a year. Value often outperforms as economies come out of a recession. This can be seen in the graph below, for example with the tech bubble and the financial crisis.

MSCI World Value/Growth relative performance and US 2-year Treasury yield

Source: MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Index levels are calculated using price indices in local currency. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2020

Japan has experienced a prolonged period of economic weakness and low inflation, which may provide a valuable lesson for the current environment. It has been hard to make money in Japan, however it is value stocks that have shown a greater potential for returns. Whilst there are differences between the Japanese economy and those of the UK and Europe, we believe the lessons learnt in Japan have shown the opportunity for value stocks to outperform, even though interest rates remain low. Could the past couple of weeks be the start of the reversion? Airlines, energy companies, house builders and banks share prices have all risen, and these are the companies that markets have dismissed.

The argument here is that ultimately the relationship between growth and value stocks reverts to the mean. It is not clear when value stocks will consistently outperform again but putting all your eggs in one basket and only investing in growth stocks is not without its risk, particularly when valuations are so high. The outlook is uncertain, and we believe that having a balance of growth funds and value funds in our portfolios makes more sense. We use a barbell approach when constructing our portfolios and as such, we have exposure to both styles, which demonstrates our use of diversification within our multi-asset approach.

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