Nick Evans writes that new factor analysis underscores the ‘regime shift’ in stock performance and investor asset allocation preference that is taking place amidst the major equity market pullback of the last few weeks.
Value stocks are significantly outperforming growth stocks and with investors renewing their focus on previously unloved value plays after the growth-focused equity market dominance of the past several years.
According to research by Investment Metrics – a provider of investment analytics, reporting and data for institutional investors, asset managers and asset owners – recent monthly factor analysis of equity market performance in the US, Europe, Emerging Markets and Australia shows the return of value, along with yield, as the key driver of relative performance in April’s turbulent equity market conditions.
As investors have increasingly shifted to more defensive plays – spooked by rising rates, spiking inflation, supply chain disruption, and the war in Ukraine – sentiment towards value stocks has undergone a major shift, with companies in beaten-down sectors like energy, resources, pharma, and banks heavily outperforming their counterparts in tech and other growth sectors that have been battered.
The Investment Metrics data looked at how the principal investment factors (and sub-factors) performed in April as investors increasingly brace for recession across Europe and the US. In the US, Value, Yield and Quality all outperformed strongly, with Growth and Volatility significantly underperforming. In Europe, Value, Yield and Momentum outperformed, while Growth and Volatility underperformed and Quality showed mixed results.
Australia also saw major gains in Value, just like in the US and Europe, while Quality and Growth underperformed, although Growth stocks were not hit as hard as in the US. And in Emerging Markets, nearly all factors underperformed and Growth was hit hard – with Value showing mixed results and being only narrowly positive on average.
In both the US and Europe, there was strong outperformance in Value across all the main sub-factors analysed by Investment Metrics – led by earnings yield and cashflow yield, but also comprising EBITDA to EV, sales to price and book to price. In Growth, by contrast, the only sub-factor to outperform was dividend growth – while earnings growth and sales growth both underperformed significantly. “Overall, investors with a risk-off approach and/or strong Value bias were rewarded,” said the firm’s analysts.
The slump in tech and other growth stocks this year has hit investors hard. High-profile casualties include Chase Coleman’s tech-focused Tiger Global hedge fund (down almost 45 per cent YTD), Masayoshi Son’s SoftBank (whose tech-dominated USD100 billion Vision Fund recently announced a loss of USD27 billion), and Cathie Wood’s ARK Innovation ETF (down more than 50 per cent for the year).
Amidst the tech sell-off, value stocks have begun to outperform significantly – with investors reviving their focus on value as an investment factor and reversing the dominance of growth investing that has persisted ever since the onset of the Global Financial Crisis in 2008.
Iconic value investor Warren Buffett’s Berkshire Hathaway has made big investments in areas like energy and banking in recent weeks, while renowned value-focused asset manager GMO’s co-head of asset allocation Ben Inker was quoted in an interview saying that “it’s a lovely time to be long value and short growth” and T Rowe Price’s head of asset allocation for Europe and Latin America recently told the FT that there was “a regime shift under way”.
The disparity between the relative performance of value stocks versus growth stocks is underlined by the year-to-date returns of two flagship ETFs managed by BlackRock’s giant iShares operation. While the iShares S&P 500 Growth ETF has tumbled by 26 per cent so far this year, the iShares S&P 500 Value ETF is down by just 8 per cent.
In a recent MLIV survey by Bloomberg of over 1,000 respondents comprising investors, portfolio managers and strategists, value trounced growth as the preferred investing style going forward – with 74 per cent of the respondents believing value stocks will outperform growth stocks for the remainder of 2022.
