Best time for value equities

One of the greatest dislocations in the market right now is between value and growth, and it is the best time to get into value investing, according to Morningstar.

Jody Fitzgerald, Morningstar head of institutional portfolio management, said the market sell-off associated with the COVID-19 pandemic had provided an almost “once-in-a-decade” opportunity.

“The sell-off has been short, in terms of its time frame, and on the surface, it looks like it’s completely recovered and you’ll hear market commentators talking about how the market is at all-time highs,” Fitzgerald said.

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“But you need to unpack that and look below the headline number, and the COVID crisis caused a huge amount of dispersion within asset classes – between sectors, countries.”

Fitzgerald said value and growth both tended to have a cycle, and there were different points in time when one was outperforming the other.

“The [current] dispersion between value and growth is the biggest its ever been since this index [MSCI World] has been tracked,” Fitzgerald said.

“What we know is value tends to perform poorly around times when the market is concerned about economic growth.

“If you look at 2018, the markets at that point in time were anticipating a recession and saw growth start to outperform.

“Now the extent of the diversion of value and growth has taken a huge leg up since the start of the COVID-19 sell-off.

“During this time, markets started pricing winners and losers – winners were anyone that could benefit from working from home, while losers were anything that were cyclically tied to the economy.”

Value was expected to do well when the market started to anticipate an economic recovery and Fitzgerald said we were in one of the deepest – and potentially – shortest economic contractions.

“But if you cast your mind back to 2018 where this dislocation occurs – fundamentally we’re in a very different position,” Fitzgerald said.

“Back in 2018, the market was anticipating a recession, we’re now in a recession and the market is anticipating a recovery, granted with some volatility around it.

“What we see now is a coiled spring when it comes to value; there’s never been a better opportunity to invest in value.”

Value versus growth relative to the MSCI World index over economic cycles




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