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The lucky country to benefit more from value rotation
The ASX is not Wall Street. A lot of the recent discussion about a style rotation, at long last, putting the value back in value investing, has focussed on the behaviour of US and global markets. A clearer focus on Australia offers a more nuanced, and relevant, analysis.
According to a blog posted last week by Reece Birtles, the CIO of Martin Currie Australia (MCA), a value-orientated manager, there are bigger opportunities in Australian stocks than global stocks if the rotation continues, as he fully expects.
Under the headline ‘The Time is Now for Value’, Birtles writes: “An interesting point for asset allocators is that the value-versus-growth cycle is more cyclical and less structurally challenged for the Australian market than it is for the world, suggesting that it is better for them to gain value exposure via their Australian equity allocation than their global equity allocation.
“Many global value portfolios are reliant on narrow index-relative positions in banks, energy and Europe versus the dominant platform, technology, healthcare and US stocks, whereas Australian value exposures are not dependent on structural or geographic bets and offer more diverse sector opportunities. Australian value stocks are also not up against the high-quality global tech companies.”
Birtles points out that the Australian MSCI value index has shown a much more significant upturn in performance since the vaccine, reflecting cyclical forces overcoming structural changes, whereas this is less evident in global indices.
“Pleasingly, the MCA ‘Value Equity’ strategy has also generated significantly more alpha than MSCI Australian and global value indices over time, proving to be both more defensive to value downturns, and also providing value exposure on the recovery.”
MCA has been a part of a chorus of managers, both in Australia and internationally, pointing out the massive spreads between growth and value stocks under all metrics, which seemed to reach a crescendo in late 2019. Then came COVID and the spreads just got wider.
Birtles says that MCA advised investors in September 2019 why value was ripe for a rebound, but the pandemic put a spanner in the works at a time when global economic growth looked likely to underpin a steady improvement for value stocks relative to growth.
He now says: “The downturn exacerbated the market’s tendency to overreact and extrapolate, which put value investing under significant pressure. However, the positive COVID-19 vaccine announcements in November resulted in green shoots for a potentially enduring value rally.
“We see that significant opportunities for value stocks remain from the wide value spreads on offer. Ahead of spreads narrowing as economies rebound, now is the time to position portfolios in Australian value stocks.”
Kimon Kouryialas, Martin Currie’s Melbourne-based global co-head of distribution, adds that big investors are well aware of what is going on, most having seen, or at least heard about, what happened during the dot-com bubble of 20-odd years ago.
“Australian equities didn’t enjoy the highs of the internet bubble stocks of the late 1990s to the same extent as the US in particular,” he says. “Nor did they suffer to the same extent when that bubble burst in 2000-2001. We were referred to as an ‘old economy’ market, which is not quite true anymore. But the Australian market still has its own characteristics, which we think MCA is well positioned to exploit.”
He says that the Martin Currie clients and other funds he speaks with both in Australia and overseas tend to be well diversified across manager styles and asset classes but there has been a greater-than-usual style creep over the past few years because of the performance of a handful of big tech stocks.
“Investors need to keep on reminding themselves that it is very dangerous to say ‘this time it’s different’… Everything reverts to the mean, by definition, over time. Otherwise, it wouldn’t be the mean.”
Note: Martin Currie is a sponsor of Investor Strategy News. Any views expressed here are those of the author and not necessarily those of Martin Currie.
