Since Pfizer and AstraZeneca’s Covid-19 vaccines were announced late last year, value stocks have rallied as investors anticipate a return to ‘normality’ and consequentially a strong period of economic recovery.
Among all of this was a significant sell-off in bond markets caused yields rose to a 12-month high, as investors worried about the impact of higher inflation.
All of this is a highly accommodative environment for value stocks, which up until the vaccine boost had been struggling to recover from 2020’s heavy sell-off.
Looking at the performance of MSCI World Value and MSCI The World Growth indices since the Pfizer vaccine was announced shows value has outperformed.
Performance of MSCI World Value vs MSCI The World Growth since 9/11/2020
Source: FE Analytics
But this is only recently – over the long term, the performance gap between the two styles is considerable.
Performance of MSCI World Value vs MSCI The World Growth over 10yrs
Source: FE Analytics
Below, Trustnet asks Fidelity’s Alex Wright and 8AM’s Andy Merricks and Tom McGrath whether value is going to be the dominant investment style from here.
BULL
Alex Wright: ‘Value’s outperformance could be very substantial’
FE fundinfo Alpha Manager Alex Wright, who manages the £2.4bn Fidelity Special Situations fund, is optimistic on the outlook for value, arguing it could be an effective hedge against inflation.
Wright (pictured) said: “The UK market - and in particular the value segment of the market - offers very attractive opportunities.
“While we have started to see a rotation into value in late 2020, and more recently as investors contemplate the threat inflation and in turn future rate rises, the dispersion in returns between growth and value stocks since the 2008-2009 global financial crisis remains unprecedented. This leads us to believe that, should investors shift their focus, the degree of outperformance could be very substantial, given how bifurcated the market currently is. 
“I am not an economist, so I don’t position the funds I manage for specific macroeconomic outcomes. But there seems to be growing consensus that later this year we could witness an uptick in inflation as economies reopen, and we could see pent-up demand and constrained supply in some areas. Indeed, on the ground many companies we talk to are increasingly seeing signs of shortages in the goods they buy, given both better-than-expected demand and inability for supply chains to ramp up fast enough to satisfy this demand. If this continues for any length of time, it would normally lead to higher inflation.
“I do feel value stocks could prove a reasonable hedge to the effects of higher inflation. One effect of higher inflation is normally higher long bond yields. This would contrast with the past decade, where we have seen consistently lower yields. If discount rates rise, then some of the very highly priced stocks/sectors could see significant de-ratings, whereas value stocks’ valuations are not dependent on overly ambitious future cashflows.
“From a bottom-up perspective, I am particularly optimistic on the medium-term outlook given not only the number of investment opportunities on offer, their upside potential, but also as I am not having to compromise on quality.
“In a typical market environment, in order to buy attractively valued stocks I would generally have to invest in companies with lower returns on capital with a view that those would be improving on a two- to three-year view. But we can currently invest in businesses with already above-average returns on capital. Unusually, we have recently been able to buy into companies that are already upgrading their earnings guidance, but whose valuations remain extremely attractive.”
BEAR
8AM’s Andy Merricks and Tom McGrath: ‘What if value’s long-term horizon doesn’t exist anymore?’
But not everyone is so bullish on the outlook for value. Andy Merricks and Tom McGrath, managers of the EF 8AM Focussed fund, don’t think value investing is a long-term investment strategy anymore.
Merricks (pictured) said: “Let me start by saying that history tells us that there is no right or wrong way to invest. It’s the differences in opinion and timescales that make a market after all. But I genuinely believe that the styles have flipped so value investing is only going to be a short-term strategy while growth investing has become the safer longer-term option. 
“I’m sure that value investors will disagree as they are often heard to say that they are long-term investors who are waiting for the appropriate entry point at which to buy a particular idea, yet what if their long- term horizon doesn’t exist anymore? They will only ever be successful in short bursts.
“Many value investors would be horrified to be labelled short-term investors as it is the very opposite to what they have learned is right, but maybe change has crept up on them without them seeing it. There would be very few, I’m sure, who would deny climate change is happening in the world in which we live, but they may be in denial of the climate change that is happening in the investment world that they inhabit.
“Take Amazon as an example. The share price and PE since 2014 is as follows: 2014: $300 – PE 525, 2016: $750 – PE 150, 2018: $1,450 – PE 180 and 2020: $3,200 – PE 90.
“Clearly it would have been a good buy in 2014, but a value investor could not entertain the idea. Even today a PE of 90 is a complete no-no to a value advocate but if you wait for fair value you may never buy.”
McGrath (pictured) continued: “Today we hear so much about value going to outperform because the global economy is reopening after the pandemic. Again, this appears to me to be a short-term concept as it can only reopen the once. Investing in companies because they have not gone bust doesn’t seem like a long-term strategy to me. 
“To a value investor the current valuations on most growth stocks are irrational. The problem is, you can’t analyse or value irrational assets using rational tools, and these are the tools to which they tend to be wedded. How do you value intangible assets? Yet most of the companies’ assets that make up the higher echelons of the S&P 500 are just that. Intangible.
“Imagine selling a product that costs next to nothing to produce to 100m+ new customers regularly over the next 10 years at the click of a button. How do you value that using traditional tools?
“Earnings from high growth businesses are scalable, repeatable and very high margin, and the compound growth effect is often underappreciated.”
Source: BCA Research
McGrath added: “To beat the average you need to make correct assumptions that are non-consensus. At the end of 2020 the ASR Asset Allocation Survey for November/December 2020 found that ‘only 9 per cent expect growth to outperform value over the next 12 months’.
“Our position is therefore deeply non-consensus, but we’re happy with that because, other than short term, we can’t see how the companies that are favoured in general by a value investor will outperform the newer, growth companies. We are happy to overweight the future and underweight the past. And the chart above shows why.
“Over the longer term, profits from the value sector are in a structural downturn while profits from growth companies continue to rise.”