The momentum market has accelerated during 2015 and into 2016 with momentum being particularly strong. As a result of multi-years of underperformance, value globally has now underperformed growth strategies by almost 4% p.a. for the last decade: this level was last reached at the height of the tech bubble in early 2000.
Value strategies significantly underperform growth strategies
Source: Bloomberg, data to 31 March 2016
Australia has been no different and indeed by some measures value has performed even worse in Australia (possibly due to the composition of our market.) Extraordinary momentum has made investing look easy and the large valuation stretch means a tough time for “value”.
Whilst the growth/momentum stocks have made all the running, many value stocks have performed quite poorly, accompanied by very erratic share price movements. This can be observed in many resource stocks: BHP Billiton (BHP) rallied almost 40% from its $14 low this year and South32, the recent BHP spin-off, rallied nearly 80% off its 90c low (with both stocks now off those highs). BHP is perhaps the best illustration of the treatment of an out of favour stock, remembering that BHP is the largest resource company in our market and indeed for many years was the largest stock in our market. It seems hard to believe that less than 12 months ago BHP was trading at $30.
Over the last year, in addition to falling commodity prices, BHP was hit with the market’s belief that it was stubbornly sticking with its progressive dividend policy (to the detriment of its balance sheet) and then the dam failure in Brazil cast both further doubt over management and created a potentially large liability.
It is difficult to be precise as many factors drive share prices, but in the weeks following the Brazil dam failure BHP lost over US$10 billion of market capitalisation for an incident which is now likely to have a cash cost less than a tenth of this amount.
Following the announcement of its half yearly result in February where BHP abandoned its progressive dividend policy in favour of a sensible payout ratio, the stock rallied strongly. However, such was the underperformance of BHP over January and early February that the stock nevertheless slightly underperformed the market over the first quarter of this year.
So – are we on the edge of a bubble bursting? And is the market about to turn in favour of value? Our view is that value stocks are offering substantial opportunities, whilst also noting that many of the momentum stocks are still trading around all-time highs. Only time will tell.
Dougal Maple-Brown,
Head of Australian Equities
For more information, please visit: www.investinexperience.com.au
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