With the extreme valuations currently being attributed to key Australian growth stocks, and the likelihood that interest rates have bottomed, value investors are set for a period of sustained outperformance, according to investment manager Maple-Brown Abbott.
The investment manager said that while each market peak has different underlying factors driving market excesses, in the end it comes down to stretched valuation multiples or unsustainably high earnings, or a combination of both.
It noted that while the price/earnings (PE) multiple for the most expensive quintile today is not quite at the extremes of the tech bubble, it is far closer to it than was the case just prior to the 2007 crash.
“In fact, the PE multiple today is a 40 per cent premium to where it was in 2007 and within approximately 90 per cent of that in 2000,” the manager said.
“Whilst current PE multiples are very stretched at the most expensive quintile, they are at a premium to both 2000 and 2007 across the rest of the range, with the highest premiums reserved for the most expensive quintiles.”
Maple-Brown Abbott pointed out that the lowest-priced stocks are those which are the least “infected” by current excesses.
It also noted data highlighting the almost unprecedented valuation tailwind that has benefitted growth managers at the expense of their value peers, who will generally be exposed to the stocks with the lowest premiums.
And given the extreme valuations enjoyed by much of the industrial segment of the market, the firm said it is inevitable that leadership of the market will change, and with that the fortunes of value managers.
“The periods of outperformance by value managers over the past decade and more have been unusually episodic in an environment of continually declining interest rates. It has been easy to dismiss value as a peripheral strategy,” Maple-Brown Abbott said.
“Given the extreme valuations attributed to key growth stocks, and the likelihood that interest rates have bottomed, we are of the strong view that value is set for a period of sustained outperformance.”