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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.

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
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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

 

 

Recession peak

Recession

trough

Start of recovery

End of recovery

# Months of recovery

Performance of Value vs S&P 500

August 1929

March 1933

May 1932

August 1932

3

+78.3

May 1937

June 1938

May 1940

July 1941

14

+33.0

February 1945

October 1945

August 1945

November 1945

3

+11.1

November 1948

October 1949

March 1950

January 1951

10

+29.7

July 1953

May 1954

December 1953

August 1955

20

+25.9

August 1957

April 1958

December 1957

September 1959

21

+39.3

April 1960

February 1961

June 1960

May 1961

11

+9.8

December 1969

November 1970

December 1969

August 1970

8

+9.0

November 1973

March 1975

November 1974

February 1976

15

+38.2

January 1980

July 1980

November 1980

September 1982

22

+45.1

July 1981

November 1982

June 1983

November 1984

17

+23.0

July 1990

March 1991

December 1991

June 1992

6

+18.1

March 2001

November 2001

October 2001

June 2002

8

+10.3

December 2007

June 2009

February 2009

April 2010

14

+25.9

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.

Published: 04 March 2021

VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) is the responsible entity and issuer of units in the VanEck Vectors MSCI International Value ETF (‘VLUE’). Units in VLUE are not currently available. This is general advice only, not personal financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Read the PDS and speak with a financial adviser to determine if the fund is appropriate for your circumstances. The PDS is available here. VLUE is subject to investment risk, including possible loss of capital invested. The PDS details the key risks. Past performance is not a reliable indicator of future performance. No member of the VanEck group guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from the fund.

VLUE is indexed to a MSCI index. VLUE is not sponsored, endorsed or promoted by MSCI, and MSCI bears no liability with respect to VLUE or the MSCI World ex Australia Enhanced Value Top 250 Select Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and VLUE.


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