Signs of relative resilience in US “value” stocks this autumn has nurtured optimism among analysts that this long-languishing corner of the stock market could finally enjoy a renaissance in 2019.
Value investing consists of picking unloved stocks that are trading below their theoretical value in the hopes of significant profit when the firm falls into favour.
Value stocks have radically underperformed since the financial crisis, as investors have flooded into racier “growth” stocks, especially technology. But this autumn’s equity market turbulence has whipsawed growth stocks trading at high valuations, while value stocks have exhibited notable fortitude.
Since the start of October, the Russell 3000 Value index has dipped 2.4 per cent, while the previously high-flying Russell 3000 Growth index has suffered a painful 7.1 per cent reversal.
Growth stocks have enjoyed a recent bounce, paring back the outperformance of value. But Morgan Stanley’s analysts argue that markets are on the cusp of a regime change where investors’ willingness to pay up for growth stocks will be damped by rising interest rates.
“From a style perspective, we think there is a major leadership change occurring from growth to value which could be more long-lasting than most appreciate,” the investment bank wrote in its 2019 outlook. “The bottom line is that investors need to pay more attention to valuation now, especially for over-loved growth stories that are effectively the longest duration assets in the world.”
However, many investors remain sceptical after the long stretch of underperformance which left some value stalwarts questioning their faith and triggered talk of “the death of value”.
As Morgan Stanley itself noted in a subsequent report published this week: “While pushback wasn’t overwhelming, clients didn’t exactly embrace our views, with the least support for value over growth and international stocks outperforming the US.”