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Value’s waking nightmare ends
While total returns for value investing have been reasonable – annualizing 12 per cent over the decade to 31 May – value investors have still struggled to match the stratospheric returns provided by growth stocks over that same time. But with the advent of a new inflationary era and the end of experimental monetary policy with a frenetic tightening cycle, the tables are now turned – and the Morningstar Australia Equity World Large Value category has outperformed Equity World Large Growth by over 15 per cent.
“It has also been by good fortune that the universe of investable value stocks had narrowed into previously out-of-favour cyclical sectors such as energy and materials, which are now benefiting from geopolitically induced tailwinds,” said Michael Malseed, director of manager research at Morningstar.
“Value stocks are not immune from the impact of rising interest rates, but they are likely to benefit in relative terms, as overall valuation dispersion in the market narrows. Value stocks are also set to benefit from stronger net asset-backing or book value, which provide an anchor from which to ride out market volatility.”
The winners in the current environment have of course been energy stocks, which have rallied 47 per cent YTD and 70 per cent in the last 12 months while accounting for only five per cent of the global benchmark. Consumer discretionary stocks have been hit hardest as they cycle from a period where consumers substituted expenditure on services to expenditure on goods during the early days of the pandemic.
“Consumer goods stocks are now facing the dual headwind of rising input costs and slowing demand, which is squeezing profit margins… Meanwhile, technology stocks have significantly retraced year to date, broadly driven by multiple deratings. Where stocks have missed expectations, such as Netflix NFLX, the market’s response has been severe,” Malseed said.
And the pain for growth won’t end with the current selloff. While that selloff has been indiscriminate, there will likely be increasing dispersion between returns as “business models are exposed and exorcised from the market, while real businesses with competitive advantages that can be maintained should be better able to weather the storm.” It’s essentially a stockpicker’s dream after the waking nightmare of the 2010s;
One big winner from the current period has been the PM Capital Global Companies Fund, which has returned some 6.79 per cent year-to-date. GQG Partners’ Global Equity Fund has returned a robust 3.62 per cent and 17.94 per cent over the last 12 months. On the other end of the spectrum, a handful of growth investors: Magellan High Conviction (-24.93 per cent YTD); Hyperion Global Growth (-31.48 per cent YTD); and Bailie Gifford Global Growth (-39.77 per cent YTD).
“The return of inflation, and the corresponding central bank reaction has made the outlook for global equities more challenging,” Malseed said. “We have definitely departed from the “not too hot, not too cold” Goldilocks environment that had supported easy monetary policy and equity market growth of the past decade.
” However, it is pleasing to see that within such a challenging investment framework, certain styles and skilled stock-pickers are able to capitalise on the opportunities that market volatility throws up. We expect performance dispersion to continue and see this period as an excellent opportunity for active managers to prove their worth against passive alternatives.”
