Relative value
Higher inflation and growth are of course conducive to outperformance of value stocks, but there is another factor that speaks for value. “It’s the only sector that still offers relative value,” notes Bouma.
At the end of June last year, around the time when the resurgence of value stocks got underway, the valuation gap between quality growth and value indeed was at a record high (see graph to the right). But value stocks have since all but closed (for US equities) or significantly narrowed (for European equities) the performance gap with growth equities they had built up over the previous two years.
Considering the recent tendency of markets to immediately price in all positive news, one should wonder how much further the value rally has to go, especially when considering we are now seven years into an equity bull market.
“It’s indeed strange to buy value when you approach the end of the cycle,” admits Alvaro Martín Sauto, head of funds-of-funds at Bankia in Madrid. But this thought hasn’t stopped him from joining the value bulls.
“We still hold quality stocks, but are diluting these holdings by investing new inflows in value equities. So we are switching gradually from telcos, utilities and consumer staples to mining and banks. A fund we have taken more exposure to is the Invesco European Equity Fund, which is oriented on financials.”
European financials are indeed an outstanding example of a value sector. While American banks have actually outperformed the rest of the market since 2009, and especially since Trump’s election, European banks still trade well below pre-crisis levels. Even though share prices of European banks have spiked recently, there is still a lot of potential for both multiple expansion and earnings growth as the Eurozone economy picks up and interest rates finally start rising from record-low levels.
Downside risk is considerable, with a return of the euro crisis just one of the concerns, but long-term investors should probably take the gamble.
