Short-sightedness, rates moves and a potential boost for Value

Short-sightedness, rates moves and a potential boost for Value

18-11-2022 | Insight

The strong Value rebound from its 2018-2020 winter has triggered numerous questions on whether it can sustain this run. We address this by assessing how investors can frame current valuations, examining the relationship between interest rates and value performance, and looking at the role of growth expectations by studying the dynamics for value and growth stocks.

  • Matthias Hanauer
  • Guido  Baltussen
    Head of Factor Investing
  • David Blitz
    Chief Researcher
  • Sebastian  Schneider

Speed read

  • Spread in valuation multiples remains wide by historical standards
  • Relationship between Value and interest rates is not structural
  • Extrapolative growth forecasts also drive the Value premium

The poor performance delivered by value strategies from 2018 to 2020 was accompanied by an extreme widening of valuation multiples between value and growth stocks, with the former getting cheaper than the latter. But the solid recovery over the last two years could perhaps leave some investors wondering whether the value style is now less attractive.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates

Value factor remains relatively cheap in historical terms

In Figure 1 we show the valuation spread of the value factor,1 meaning the differences in valuation multiples of value and growth stocks.2 As we control for valuation differences that are normally observed between both portfolios, a valuation spread that is above one indicates cheapness, while a reading below one implies that the factor is relatively expensive.

Figure 1 | Composite valuation spread of the enhanced Value factor

Source: Robeco, Refinitiv. The chart shows the composite valuation spread between the top and bottom quintile portfolios of the enhanced value strategy. The investment universe consists of constituents of the MSCI Developed and Emerging Markets indices. Before 2001, we use the FTSE World Developed index for developed markets (going back to December 1985), and for emerging markets, the largest 800 constituents of the S&P Emerging BMI at the semi-annual index rebalance (going back to December 1995). The value spread is the average spread of the book-to-market (R&D adjusted), EBITDA/EV, and CF/P. The sample period is January 1986 to October 2022.

Interestingly, the spread has only shrunk slightly during this period. More specifically, it is still wider as at the end of October 2022 than it was at the beginning of the value winter in 2018. To put things into perspective, the current spread is even wider than it was at the peak of the dot-com bubble in 2000.

Furthermore, value is not only cheap from a relative perspective, but also on an absolute basis as it trades at a forward price-to-earnings ratio (PE) of slightly above 8x. Therefore, the medium-term return expectations for Value are bright, especially if valuations revert to ‘normal’ levels (more on this in the full article).

Despite the strong recent recovery, the value factor is still cheaper than it was at the beginning of its drawdown. This is because, while changes in the value spread explain a large portion of the value returns, they do not explain them entirely. The remaining variation stems from three components: namely carry, portfolio migration and changes in fundamentals (these are discussed in detail in the full article).

Value is not just a beneficiary of rising yields

A popular question is whether the latest rise in interest rates caused the recent value comeback. In our 2021 article,3 we already investigated this notion and documented that while the relationship has been evident recently, it is much weaker over the long run and for longer-return horizons. In this section, we revisit this issue but approach it in a less technical way.

Figure 2 illustrates the relationship between US value returns and contemporaneous changes in the US 10-year Treasury yield. The chart confirms our previous research results as we find little to no evidence that the value factor correlates to interest rate changes for the period spanning from January 1986 to December 2017. However, the correlation has been higher over the last five years.

Figure 2 | Value returns and interest rate changes

Source: Robeco, Refinitiv, FRED. The chart shows the relationship between U.S. value returns and contemporaneous changes in the U.S. 10-Year Treasury yield. The investment universe consists of U.S. constituents of the MSCI Developed Market Index. Before 2001, we use the FTSE World Developed Index (going back to December 1985). The sample period is January 1986 to October 2022.

But even in recent years, the relationship has been far from perfect. In fact, changes in interest rates explain only a small fraction of the variation in the value returns. Interestingly, the last few months indicate that the relationship may have weakened again. For instance, May 2022 was an excellent month for value while yields slightly decreased, whereas August 2022 was a rather bad month for the factor even though interest rates increased by nearly 50 basis points.

Based on this analysis, we believe that the relationship between value returns and interest rates is not structural – or causal – but more a temporary phenomenon that might well provide some tailwinds for value in the months ahead. However, while the positive relationship between value and yields might persist for some time, possibly due to some self-fulfilling prophecy, we do not believe that interest rates will be the decisive factor for value in the years ahead.

Growth stocks do not necessarily have higher future growth

One reason many investors might believe that interest rates drive the returns of the value factor could be based on the argument that growth stocks exhibit longer duration than their value counterparts. Therefore, they should benefit from a lower discount rate being applied to their cashflows and suffer from rising yields.

We acknowledge this line of reasoning but believe that the relationship is ambiguous, meaning one could argue that value stocks are ‘bond-like’ as their prices are driven less by growth expectations and more by their earnings and dividend power in the years ahead. This would imply a negative relationship between value returns and interest rates.

That said, we looked into whether expensive stocks really do have higher future growth. In our analyses, we sort stocks based on valuation multiples and not on past or expected growth. And while companies with high historical growth in sales or earnings typically trade at higher multiples, future long-term growth is much harder to forecast.

Figure 3 depicts the previous five-year realized growth in earnings and analysts’ long-term (five-year) earnings per share (EPS) growth expectations at portfolio formation (t=0), and up to ten years (t=120) after this for the cheap (‘value’) and expensive (‘growth’) quintile portfolios versus the universe. The chart shows that the spread for both historical growth and growth expectations between value and expensive firms is indeed highest at portfolio formation.

Figure 3 | Realized and expected earnings growth for Value quintiles after portfolio formation (AC)

Source: Robeco, Refinitiv, I/B/E/S. The chart shows the previous 5-year realized growth in earnings and the long-term (5-year) EPS growth expectations of analysts for the top (value) and bottom (expensive) quintile portfolios of the enhanced value strategy at portfolio formation (t=0) and up to ten years (t=120) after portfolio formation. For each measure and month, we compute the median for both the cheapest and most expensive quintile and deduct the universe median. The investment universe consists of constituents of the MSCI Developed and Emerging Markets indices. Before 2001, we use the FTSE World Developed index for developed markets (going back to December 1985), and for emerging markets, the largest 800 constituents of the S&P Emerging BMI at the semi-annual index rebalance (going back to December 1995). The sample period is January 1986 to October 2022.

Analysts expect expensive companies to generate about 4% higher EPS growth than the average company, while value firms are expected to deliver around 2.5% lower growth. These numbers are remarkably similar to the realized growth numbers that the two groups of stocks achieved over the five years before portfolio formation. Therefore, it seems that analysts extrapolate past growth into the future.

This difference in growth expectations is a key reason why investors are willing to pay a higher price for growth firms. However, these differences are not persistent. As shown in the chart, the spread in both growth expectations and realized growth rapidly converges in the years after portfolio formation, with value stocks experiencing improvements in growth realizations and expectations, whereas their expensive peers encounter deteriorating growth realizations and expectations.

After eight years, we see that the actual difference is less than 1%. Therefore, investors appear to be overpaying for the expected growth differences at portfolio formation, as analysts and other market participants extrapolate historical growth too far into the future. In other words, realized growth does not live up to expectations. As a result, we view these converging growth expectations as one of the driving forces behind the value premium.

1 We define value as in Blitz, D. C., and Hanauer, M. X., January 2021, “Resurrecting the value premium”, Journal of Portfolio Management. More specifically, the enhanced value strategy is based on a composite of book-to-market (R&D adjusted), EBITDA/EV, CF/P, and NPY metrics. Value stocks are sorted into quintile portfolios based on the valuation composite, in a region and sector neutral manner for developed markets and in a country neutral manner for emerging markets. Quintile portfolios are equal-weighted and rebalanced monthly. Our sample comprises the standard MSCI All Countries Index constituents, i.e., large and mid-cap stocks across both developed and emerging markets.
2 The ‘value spread’ is expressed as the ratio of a basket of valuation multiples of the top and bottom quintile value portfolios. We control for value spread differences that are normally observed between both portfolios, such that a value spread above one indicates cheapness. Since cheap stocks by definition have higher fundamental value to price ratios than their expensive peers, it is particularly important for the value factor to scale the value spread by its historical normal level.
3 Baltussen, G., Hanauer, M. X., Schneider, S., and Swinkels, L., September 2021, “What valuations and interest rates tell us about equity factors”, Robeco article.

Important information

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.



1. General
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. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
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:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

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
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. 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. Third party off-site pages or websites are provided for informational purposes only.

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.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

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. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree