Value investing is expected to make a comeback as valuation dispersion in domestic shares is nearing record levels in Australia, according to the research by Perennial Value Management.
A white paper, titled “Time to shift gears from Momentum to Value Investing”, showed that the divergence levels were higher than those seen in the global financial crisis (GFC) and approaching those of the early 2000s dot-com boom, meaning market dynamics were likely to shift in favour of value stocks.
Perennial’s managing director, John Murray, noted that previously when valuation divergences reached this level, there was a reversion towards cheap value stocks and away from expensive growth stocks.
He also said that with growth returning to the broader economy and interest rates rising, investors’ preference was likely to swing towards value investing as it had in the past, as paying such a high premium for growth would no longer make sense.
“Although every new situation is different, it’s worth remembering that while history doesn’t always repeat exactly, it usually rhymes. With a generally improving earnings growth outlook and rising interest rates, we see an inflection point in the rate cycle where the era of easy money is largely over and the conditions for value to outperform could be near,” Murray added.