He says approved vaccines make it possible for the world to return to normal, favoring the more cyclical and lockdown-hit stocks that have so far suffered during the pandemic.
Value stocks are companies whose share prices do not match the perceived underlying potential of the business, offering upside. The style has underperformed growth investing, which favors high-growth industries such as technology, for more than a decade.
“November saw big moves in markets as the announcement of several Covid-19 vaccines with a high effectiveness handed the keys to the resolution of a pandemic that has brought the deepest recession since the 1930s,” says Van der Welle, strategist with Robeco’s multi-asset team.
“Stock market indices broke new highs, with the largest inflows into equities in recorded history in recent weeks. November saw a decent outperformance of value stocks versus growth stocks of close to 5%. Value stocks that have been lagging the recovery trade since March have experienced a rerating since the vaccine news broke in November.”
“This catch-up has raised the question of whether the long-awaited rotation from growth to value has finally begun – the jury is still out on this. In November, value stocks jolted 15% higher, but tech stocks also rose substantially, gaining 10.9%.”
“We think that the announcement of several effective vaccines and nascent approval for one of them in the UK has nonetheless brought the value tortoise on the move, with further upside for value stock outperformance seen in 2021.”
One market dynamic is that after so many months of being downtrodden during the pandemic, value stocks have become exceptionally cheap relative to their growth stock counterparts.
“Valuations are not always a useful tool for tactical asset allocation and are rarely an autonomous trigger,” says Van der Welle. “And in the value versus growth debate, there might be good reasons to think that tech stocks are on a secular uptrend, and therefore deserve to trade at a higher multiple. The Covid-19 pandemic and its aftermath have accelerated the digital transformation thesis that benefits growth stocks.”
“Yet, with a relative price/earnings multiple of around 2, the dispersion between value and growth valuations has become exceptional, and it suggests the value factor will see returns above the historical average in the medium to longer term, outperforming growth stocks.”
So, has the value in value been finally unlocked? Van der Welle says three arguments favor the theory that value is back. “First, value has the tendency to outperform at the beginning of a new economic cycle,” he says. “While our business cycle model still signals an economic slowdown, we expect it to go into a flash ‘recovery’ soon.”
“At the end of recessions, yield curves in the bond markets start to steepen, as bond investors start to demand a higher compensation for growth risk in the market. Value stocks have tended in the past to rebound relative to growth stocks, as yield curves steepened further in the early recovery phase.”
The second favorable factor is the absence of ’economic growth scarcity’ as the world emerges from the pandemic. “Growth stocks have shown a strong multiple expansion in recent years, as investors were willing to pay up for companies with cashflow generation ability in a late-cycle, growth-scarce environment,” Van der Welle says. “This accelerated when the Covid-19 recession peaked in March. With economic growth scarcity now on the verge of fading, a headwind for value stocks disappears.”
Finally, Van der Welle says governments have shown a greater willingness to provide fiscal support during this pandemic, in sharp contrast with the global financial crisis aftermath, when governments were even pursuing austerity.
“This accommodative fiscal stance, facilitated by central banks acting as credible fiscal financiers, has two major implications for the value trade,” he says. “First, higher net government issuance as a consequence of fiscal easing exerts upward pressure on bond yields, which benefits the less interest rate-sensitive segments of the equity universe such as value stocks.”
“Second, if government spending is effective, there are positive multiplier effects on the real economy, which benefits more growth-sensitive stocks like value stocks.”
However, Van der Welle cautions against getting too carried away. “The recent outperformance of value stocks could predominantly be because they are catching up rather than due to a rotation,” he says.
“Investors didn’t dump growth stocks in November, so the November market action should not be prejudged as a great rotation out of growth to value. The big winners in November were the stocks that suffered the most because of the pandemic, and were simply laggards since the March bull run.”
“Looking ahead, the improved outlook for hospitality and leisure in the wake of a vaccine will also indirectly benefit growth stocks through things such as higher advertising revenues from hotels and restaurants on digital platforms. The digital transformation of the global economy will remain a secular tailwind for growth stocks.”
“In addition, the steep rise in Covid-19 cases, a volatile US presidential power transition, and a spat between the US Treasury and the Fed, which is hampering coordination between fiscal and monetary policy, are key near-term risks for value.”
It all boils down to beating Covid-19. “With inoculations due to begin this month in a few major economies, the trilemma between solving the health crisis, kick-starting economic growth and maintaining personal freedoms is going to be considerably eased,” he says.
“The case for additional value outperformance in the next 12 months is strengthening. But we are not out of the woods yet. The road to a post-Covid-19 ‘new normal’ will not be smooth, which implies selective exposure towards the value tilt against a backdrop of near-term risks. The value tortoise may have made some promising moves lately, but it has yet to bridge a soft patch.”
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商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会