ARTEMIS

IS THE TIDE TURNING TO VALUE?

Raheel Altaf, manager of the Artemis Global Emerging Markets Fund, discusses value as an investment style.

For a number of years the environment has supported ‘growth’ stocks over ‘value’ stocks. Is the tide starting to turn?

Indeed, the combination of historically low interest rates, a protracted but weak economic recovery and a number of structural trends have supported growth stocks above value stocks over the last decade. Investors’ risk aversion has been another important factor. At the time of writing, the tide is yet to turn. Rather, it has become more extreme, which indicates that we are close to an end point: growth has outperformed value by 15% year to date, even after multi-year outperformance.

This sharp de-rating is not reflective of the relative fundamentals of value stocks. As a result, dispersions in valuations are at extreme levels in many markets around the world (Chart 1). History suggests this will not carry on and a subsequent reversion is likely to mean that value stocks offer an attractive opportunity to investors.

Time for a comeback? Rolling 10 year value vs. growth performance

80%

60%

40%

20%

0%

-20%

-40% 1985 1990 1995 Developed markets

2000 2005 Emerging markets

2010 2015 2020

The early stages of recovery may be volatile, but the optimism expressed in highgrowth stocks’ valuations suggests that there are plenty of opportunities in overlooked value stocks.

What economic characteristics will allow value to regain ground lost to growth over recent years?

The value strategy is often cyclical in nature, outperforming in periods of economic recovery and underperforming during periods of stress. But we would note that this hasn’t always been the case. As an example, value strategies performed significantly better after the bursting of the dot-com bubble.

The general perception that value stocks perform well in an improving or accelerating economy is related to a number of lowly valued companies being found in more economically sensitive (cyclical) sectors. However, we currently find many companies offering reasonable or cheap valuations in more defensive parts of the market, such as telecoms or utilities.

Given some value stocks (particularly financials and commodities) tend to benefit from reflation, their performance has become more closely linked to bond yields. With only fleeting signs of bond yields rising in the last five years, this has held performance back for these sectors.

We would caution investors on setting too much store on these relationships. Looking back over more than 100 years, value

strategies have delivered strong performance across different environments in the market. A better indicator of the future performance of value is more likely to come from mean reversion, with value stocks much cheaper than they have been historically.

What other alternatives should investors consider – momentum/ pragmatism/factor based investing?

We prefer to use a range of valuation metrics when assessing value. Earnings per share can be manipulated, cashflows less so, so we tend to look at these. Price to earnings ratios can seem cheap for companies with peak profit margins or with high levels of debt. So enterprise value metrics, which include a company’s debt obligations, are helpful to give a broader picture. A blended approach, combining different metrics, helps avoid the pitfalls of using an individual metric.

We try to avoid ‘value traps’ by using sentiment and momentum measures. Share prices stabilising or improving often mark the bottom and are helpful with timing. Combining momentum measures with valuation measures tends to work well.

Beyond these measures, we also assess fundamentals carefully. The strength of a company’s balance sheet is particularly important in times of stress. A company may be cheap but it needs to be able to weather a difficult environment in order to deliver better growth in the future. n

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