By Mark Barnes, head of investment research (Americas) and Marlies van Boven, head of investment research (EMEA)
The Value factor has underperformed globally for the past 14 years, prompting some even to wonder if Value is ‘dead’. But, as our research shows, the factor’s behavior has varied starkly across equity markets and time. These differences offer clues to potential catalysts that could fuel a Value revival.
For most of the post-GFC era, Value has suffered a structural double whammy from its large overweight to badly lagging financial stocks and underweight to highflying technology stocks prized for their reliable growth prospects, particularly in the US.
This year, as the COVID-19 crisis unfolded, Value’s overweight to oil, especially in the UK, and underweight to outperforming health care added to its woes. Overall, financials, oil and other deep-cyclical sectors have languished in the ‘low-growth, low-yield’ environment that has prevailed for most of the past decade or so.
November shows how quickly market preferences can turn
But Value’s fortunes made a dramatic U-turn in November. News of several vaccine breakthroughs ignited hopes for a stronger global economic recovery and reflation, driving robust Value outperformance in most markets (except Japan). Value did particularly well in the UK, where it beat the market by 4.9 percentage points, and in Europe ex UK, where outperformed by 4 points.
Source: FTSE Russell. Data as of November 30, 2020. Regional Value factor results shown represent hypothetical, historical performance, at Tilt 1, based on FTSE Global Equity Index Series data. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
As we wrote in an earlier blog, Value’s banner November came alongside a massive rotation away from the long-time growth winners, dominated by Internet platform giants and other beneficiaries of COVID-19 social restrictions, into many of the pandemic-stricken cyclical industries that typically are the first to recover as an economy pulls out of recession. These include oil & gas companies, which stand to benefit from stronger demand and higher prices. Financials, notably banks, also rank as major beneficiaries, as higher interest rates (and steepening yield curves) bolster their profitability.
We see the impact of this shift in the chart below, which shows the industry allocation contribution effect, or the effect of using Value to allocate to cap-weighted industries, in November.
Source: FTSE Russell. Data as of November 30, 2020. Regional Value factor results shown represent hypothetical, historical performance, at Tilt 1, based on FTSE Global Equity Index Series data. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Our research also found that an industry-neutral Value strategy, or one focused on selecting the cheapest stocks within industries, broadly added value in November, with 38 of the 60 regional industry buckets posting positive excess returns.
Potential catalysts for a sustained Value revival
Further evidence that the vaccine rollout is quickening the global economic recovery may support Value in the short run. For a more durable rotation into Value, however, more pieces will need to fall into place.
Our research shows that Value tends to perform best when the outlook for the economy is good and/or improving and yields are rising. This suggests that a sustained rotation into Value would require a return to higher expected economic trend growth and a re-normalization of monetary policy. As shown below, there is a strong historical connection between rising US Treasury yields and Value outperformance. If a pick-up in growth expectations pushes US yields back up to around 2019’s 2% level, it would increase the odds of a structural shift in Value’s performance.
Regional relative Value/Quality factor returns (rebased, TR) vs FTSE US Govt 10-year bond yield
Source: FTSE Russell. Regional Value and Quality factor results shown represent hypothetical, historical performance, at Tilt 1, based on FTSE Global Equity Index Series data. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The fast vaccine progress is clearly changing the market narrative for 2021. But, for now, numerous unknowns remain around the implementation, efficacy and uptake of the vaccine, the near-term economic toll of the renewed global outbreak of coronavirus cases and how much of the recovery outlook for next year is already priced into today’s markets.
Photo Credit: Pictures of Money via Flickr Creative Commons
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