Value stocks have underperformed growth stocks by roughly 50 per cent during the past decade, but the recent rotation in the December quarter that saw bank and energy companies come out on top has a number of investors predicting a reversal of the trend.
Martin Currie chief investment officer Reece Birtles commented there has historically been a “tight correlation between value stocks and economic growth and bond yields”.
“Given the likely ongoing recovery of economic growth and bond yields as the vaccine is rolled out and the world recovers from COVID-19, we believe that spreads will again tighten and continued significant value outperformance is likely,” Mr Birtles said.
He believes the Australian market presents a sounder opportunity than the global equity scene.
“Many global value portfolios are reliant on narrow index 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,” Mr Birtles said.
“The Australian MSCI Value Index has shown a significant upturn since the vaccine, a trend that is less evident in global indices.
Martin Currie has pointed to a number of stocks it believes are underrated, including Nine, Star Entertainment, Inghams Group, Worley, the big four banks and Medibank Private.
“Earnings per share performance between the [value and growth] styles has been remarkably similar over the last 25 years,” Mr Birtles said.
“This means that the return differential has been driven primarily by a multiple re-rating for growth stocks. The premium that people are willing to pay for growth stocks, despite similar earnings prospects has been significant.”
Sarah Simpkins
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
