The value rebound will likely continue as there is still a lot of room for value stocks prices to catch up, according to Realindex Investments.
The First Sentier equity manager said in a paper that, over the past decade, the competition between value and growth styles of investment had seen growth emerge as the winner. But while the recent rebound for value stocks was welcome, data showed that it had hardly made a dent in terms of recovery.
The ‘The Drought Breaks: A Broad-Based Value’ paper by Dr David Walsh said the value spread was still large and the most expensive names were still very expensive in historical terms, meaning it was likely that further gains for value were in store.
“It remains to be seen whether we’re at the start of a long reversal of fortune for the value style. However, if we see the runaway performance of growth as an unsustainable trend that has run its course, then we are more likely to see the value rebound as a trend that is here to stay,” Walsh said.
Also, as bond yields indicated that inflation was picking up globally, real interest rates might follow which would benefit value stocks.
“Value stocks are known to be “short duration” in nature – that is, their cashflows are near term. Growth stocks, on the other hand, are known to be long duration. In a world of low interest rates, long dated cash flows are inflated, which will inflate the value of growth stocks when compared to value stocks,” he said.
“However, when interest rates rise, growth stocks’ valuations will decrease much more quickly, for the same reason. It then follows that an increase in inflation and interest rates will hit long duration names harder. In other words, value will outperform – and this is indeed what we have seen recently.
“There is a lot of room for value stock prices to catch up. Inflation and interest rates may be ticking up, which normally creates positive conditions for value stocks. And finally, it appears that the ‘smart money’ is on value, with the analyst community looking more favourably on them. We think the signs are good for value investors.”