We think now is a very good time for investors to introduce value stocks to their portfolios. Investors adopting a more defensive investment strategy would be wise to gradually make space for value stocks in 2019.
Will 2019 mark the long-awaited revival of so-called value stocks? Value stocks are stocks of companies that are undervalued based on price-earnings ratios, mostly because of the boring, overly conservative business model these companies use. The lack of frills that characterizes these types of stocks is often why news about companies in this class elicits a tepid response from investors, in contrast to the way they devour news about growth stocks.
Value stocks have lost a staggering 35% against growth stocks in bull markets since 2009. Due to this long period of lagging returns, the relative performance of value versus growth stocks now seems completely out of balance. First, a similar performance in around 2000 heralded a rotation out of growth stocks into value stocks. This rotation also took place in a macroeconomic environment that, knowing what we know now, we can typify as ‘late cycle’ – a phase we also seem to have reached now.
Second, the price-earnings ratio of the MSCI Value Index is currently 21% below that of the MSCI World Index, which represents an above-average discount level. While value stocks should be cheap now, too, based on other valuation criteria such as dividend, price-cash flow ratio and book value, they look even more attractive compared to their historical average discount. With both valuation and the phase of the economic cycle in mind, a return of value stocks seems very likely.
Another aspect is that relatively efficient financial markets look further ahead than just one calendar year. As we look further on the horizon, the economic picture slowly changes. If the US economy continues to fire on all cylinders, the Fed will have no choice but to gradually, but resolutely, continue hiking rates to a level that will, on balance, put the brakes on the real economy. Historically, this transition to net tighter monetary policy has been a favorable environment for value stocks.
Rising rates will hurt the more rate-sensitive momentum and growth stocks and gradually more fine cracks will appear in this momentum-driven bull market, thereby increasing the downside risk. This environment will thus also set the stage for restoring more balance between the typical initial indifference of investors to value stocks and their corresponding disproportionate enthusiasm for growth and momentum stocks.
Nevertheless, there are also a number of risks that may hamper a value-stock comeback. As long as momentum stocks continue to forge ahead, there are few gains to be made for value investors. The leadership of momentum-driven growth and technology stocks in this bull market could persist given the negligible variation in sector rotation that has so far characterized the current market. Second, short-term investing has become so commonplace in this market that there doesn't seem to be any place for an investment style − like value investing − that requires patience. Almost no one talks about these dull business models.
Third, discount rates for the future cash flows (that result from the current low interest rates) of companies are still so low that, despite the rise in interest rates we envisage, they continue to boost the more interest-rate sensitive growth and momentum stocks.
Given the developments we expect to see in 2019, now is still a very good time for investors to introduce value stocks to their portfolios. While there is no urgency for this rotation, investors adopting a more defensive investment strategy would be wise to gradually make space for value stocks in 2019. From a risk-return perspective, the opportunity costs of holding value stocks have now become very low − too low, perhaps.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.