Value rotation on the radar

The foundation of Value investing is the notion that cheaply priced stocks outperform pricier stocks in the long term.

Value companies are typically determined by selecting those with the lowest price fundamentals, such as price to earnings, relative to peers.

Value is categorised as a “pro-cyclical” factor, meaning it has tended to benefit during periods of economic expansion. In addition, Value and Growth active returns are negatively correlated. In other words, when Value outperforms Growth underperforms and vice versa.

State of play

Widely considered the market benchmark, the MSCI World Growth Index has consistently outperformed its Value equivalent since the 2008 Global Financial Crisis (see Chart 1). When the line is going up, Value is exceeding Growth.

In recent months, changes in macro signals bode well for a potential Value rotation. Value outperformed growth by 8.31% in AUD terms over 6 months to 28 Feb 2021.

Chart 1 – Cumulative performance of MSCI World Value Index relative to MSCI World Growth Index since 1975

Source: Bloomberg


Value macro signals

1. Dispersion between Value and Growth valuations is the highest in 20 years

MSCI World Growth 12-month forward price to earnings ("PE") valuations are near 2000 dot com bubble highs (Chart 2). MSCI World Value price to book ("PB") relative to growth is at a 25-year low (Chart 3).

Chart 2  and 3 – MSCI World Growth and Value valuation comparisons

Source: Bloomberg

2. Value stocks led the equity markets recovery after the previous 14 US recessions

Markets anticipate a strong global economic recovery in 2021 supported by the COVID-19 vaccine rollout, government and central bank expansionary measures.

Table 1 - Relative returns of Value versus S&P 500 after recessions, 1929 to 2009

Source: BofA US Equity & Quant Strategy, Dartmouth University Data Library, Bloomberg S&P 500 comparison used due to data availability. Peak and trough dates from NBER.

3. Higher inflation and yields have historically been better for Value

Inflationary expectations have sharply improved since Q2 2020 reaching 5-year highs. A high inflation environment supports Value valuations relative to Growth (Chart 4) and puts upward pressure on long dated bond yields, a reflection of early economic cycle expansion (Chart 5).

Chart 4 : US inflation rate market expectations is rising | Chart 5: Rising yields is a leading indicator for economic recovery

Source: Bloomberg

Accessing international Value companies

VanEck is this week launching Australia’s first smart beta international equities value ETF on the ASX in partnership with leading index provider MSCI. The VanEck Vectors MSCI International Value ETF (ASX: VLUE) will invest in approximately 250 international companies selected for their higher value characteristics relative to sector peers.