The market seems to have been pointing in one direction for much of the past decade, with momentum-led investing creating a broad gap between loved and unloved stocks.
During the past five years markets have been driven mainly by large-cap names with a focus on growth such as the US technology stocks.
They have been aided by unprecedented quantitative easing (QE) measures from central banks injecting huge sums into the financial system as well as low interest rates, which have forced more risk-averse investors into equities.
As such, the winners have been the growth and momentum trades. Indeed, when looking at the MSCI World Growth, Momentum and Value indices, the latter lags significantly behind the others despite a strong year in 2016 when the trend briefly reversed.
Performance of indices over 5yrs
Source: FE Analytics
Last week, Hargreaves Lansdown senior analyst Laith Khalaf noted that while many have predicted that the UK market will mean revert – with value outperforming at some point – it has yet to do so.
“I have no crystal ball but you would expect at some point there will be some sort of reversion in terms of interest rate policy and in value turning the corner versus growth,” he said.
“I wouldn’t bet on that being anytime soon though because historically it has been shown that people have expected that to happen and it hasn’t materialised so far.”
Below, FE Trustnet polls a number of other market commentators to see whether they believe the market will mean revert in the next five years.
Richard Philbin, chief investment officer at Wellian Investment Solutions, said having a beta slightly higher than one over the past five years would likely have given investors a better-than-average performance without the need to accept higher-than-average volatility as there hasn’t been much rotation either between styles (value and growth) or sectors.
However, he noted that the next five years will not have the same risk-return output.
Interest rates, Brexit and inflation will all likely look very different from where they are today, he argued.
“The key drivers that pushed the market higher might not be the same drivers as we look forward,” the Wellian CIO said.
Additionally, he said that the price volatility of the market will likely be higher than witnessed over the past few years as QE is unwound and interest rates start to return to more normal levels.
“There will be winners and losers – they might not be the same ones as previously seen,” said Philbin.
“Sadly, yes, I do expect a mean reversion and probably inside five years,” added Skerritts Wealth Management’s head of investments Andrew Merricks. 
According to Merricks’ research, equity markets peak six months before a recession, something which markets have not experienced for some time resulting in the longest bull run for decades.
“If things can’t go on for ever, they stop. So, each month that we progress without a recession or a bear market, we’re a month closer to the cycle stopping,” Merricks (pictured) said.
Merricks added that the current investment environment feels like the late 1990s/early 2000s ‘tech bubble’ with investors buying the hot new technology stocks and leaving value investors left in the dust.
“Fast forward to March 2000 and the bubble in tech burst. Stocks that were ‘the future’ disappeared into the past and we entered a three-year bear market,” he said.
Performance of MSCI World from 1997-2003
Source: FE Analytics
“History doesn’t repeat, but it rhymes. Quite when our own ‘Y2000’ will happen I don’t know, but when it does there will be a mass head-scratching as to how we all got sucked into the trap,” Merricks said.
“Value investors will be on their moral high horses telling us that they knew this would happen all along – which will be very annoying because they won’t tell you about how much return on capital you’ve given up if you remained faithful to their style during the great growth opportunity phase that they sat out.”
Daniel Adams, senior investment analyst at Psigma Investment Management, believes there is already evidence that the market is beginning to turn.
“Take the UK and FTSE 100 which is making all the headlines as it punctures through to new highs, up 4.2 per cent year-to-date as an example,” he said.
“Yet if you look beneath bonnet, the composition of those returns is very disparate; over half of these returns have come purely from the oil & gas sector and a further 1 per cent from materials, whereas the biggest drag was consumer staples down 1.2 per cent.
“While these returns are quite telling, what is even more stark is that this rotation has really only happened in the past couple of months.”
Adams added: “Using the oil sector as example again, BP and Shell have both rallied over 30 per cent from the March lows, that is a huge move for blue chip stocks.”
Performance of stocks over YTD
Source: FE Analytics
Jason Hollands, managing director of Tilney Group, added that while he does not know when a mean reversion might take place or indeed if we are at the beginning of a step-change, it would be wise for investors to diversify their portfolios.
“If you look at the last thirty years of data, investing in stocks with broad ‘value’ characteristics has outperformed those with ‘growth’ attributes overall,” he said.
“But, aside from a brief spike when Donald Trump got elected US president and the markets became fixated on the ‘reflation’ trade, growth stocks have enjoyed a prolonged run of outperformance in recent years with markets seemingly agnostic towards valuations.”
Hollands added: “While this could run on for a while yet if the global economic expansion continues and optimism prevails, I do believe that ultimately we will see some mean reversion and therefore it would be shrewd for investors to include some more value-orientated managers in their portfolios.”
However, he noted that there is no single approach to value investing and investors need to avoid value traps.
“What really matters is spotting intrinsic value: you have to believe a business is fundamentally sound and its earnings are at least sustainable,” he said.
While he wouldn’t advocate switching out of growth funds into deep value products, dovetailing more growth-orientated managers with value names or investing with managers who are more flexible and agnostic in approach who can adapt as the market environment evolves, might be wise for this period in the cycle.