![]() ![]() Yet market conditions have also created what we believe is an unprecedented recovery opportunity for investors willing to initiate or expand allocations to value stocks today. Many companies that are struggling with uncertain long-term prospects have been severely punished. Growth stock multiples may also suffer from potential regulatory crackdowns on megacap growth giants in the technology and consumer sectors.ĬOVID-19 has produced the ultimate value controversy. A normalization of interest rates from historic lows-as we saw in early 2021 with the rise of 10-year US Treasury yields-could put pressure on growth stock multiples, which tend to benefit more from lower rates. These trends could also prompt asset allocators to shift more funds toward value portfolios. Value earnings and multiples should benefit as economic growth increases and broadens, while visibility into post-pandemic behavior improves. In our view, the dramatic effects of the pandemic may be a catalyst for change, as five key developments ( Display) could foster an unwinding of the extreme divergence of value and growth stock valuations in the coming years. Do they reflect a new and permanent reality that investors are ignoring-the imminent death of value investing? Or do these discounts represent pent-up performance in value stocks that may signal outstanding recovery potential as market conditions turn? Sometimes a stock is cheap because the company’s earnings have become permanently impaired.įor investors, the deep discounts present a conundrum. As experienced value investors know all too well, cheap stocks can get cheaper, and extreme discounts may signal a value trap. But that would be too simplistic, given the persistent underperformance. It’s tempting to conclude that value’s bargain-basement prices alone represent a screaming buy signal. And across sectors and regions, the discounts have only moved slightly off the historical extremes seen at the end of 2020. By the end of April, the MSCI World Value still traded at a 51% discount to the MSCI World Growth-well below the 28% long-term average, as shown above. The same was true of value stocks across most major regional markets.Įven after the recent rally, the discount of value stocks to growth stocks remains exceptionally wide. ![]() By the end of 2020, in industries as diverse as consumer durables, healthcare equipment and telecom services, value stocks were cheaper than they’ve been, relative to growth stocks, at any time since 2001. This lost decade was by far the worst period on record for value, well beyond the poor performance seen during the internet bubble of 2000 and even the Great Depression of the 1930s. But by the end of 2020, as the COVID-19 pandemic devastated economic growth, the trailing 10-year returns for the cheapest cohort of stocks had underperformed the most expensive stocks by about 8% ( Display). In the US market, where the longest data history is available, the cheapest 30% of stocks, based on price/book value, outperformed the most expensive 30% of stocks by an average of 4.1%, annualized on a 10-year rolling basis since 1936. In the past, value stocks delivered consistently strong returns over time. Yet the sheer scale of the underperformance simply has no precedent in modern market history. It’s no secret that value stocks have had a rough ride in recent years. So, what’s been driving the value recovery so far, and is there more to come? To answer that question, we need to first look back at equity market trends before the pandemic. ![]()
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