That’s the general impression found in new market research from financial consulting and advisory firm, Lonsec, where its latest Australian equities sector review data indicates a renewed interest from investors in the potential for bigger returns from value stocks.
In what market experts call ‘value rotation’, where investor sentiment trends between favouring either growth or value stocks, the new data portrays a market development where investors have swung from backing what are widely regarded as ‘safer’ growth bets, to the riskier value stocks.
Considering the last decade of relatively low inflation (until recently), anaemic wages growth and falling bond yields, the investor marriage to the largely stable growth stocks was expected to be a long and prosperous one, but Lonsec believes the charm of value stocks has caught the eye of investors navigating a more dangerous market terrain.
According to Lonsec’s research, the key drivers of this value rotation are the spectre of rising interest rates and a belief from investors that inflation is gaining momentum as the COVID-19 economic recovery takes shape in an environment still impacted by supply chain disruption, tight labour markets and “still loose” monetary policy.
“Investors have increasingly been pricing in this eventuality, bidding down long earnings duration assets whose valuations are more interest rate sensitive and rotating into ‘value’ stocks like diversified miners and financials likely to benefit more from the macro environment,” the research from Lonsec said.
Lonsec Director of Research, Peter Green, said there’s been a “growing shift” in the market over the past 12 months, “but this has really picked up in the last three months with outperformance jumping from 61 per cent to 91 per cent of value funds”.
But the infatuation may not necessarily be everlasting.
“While outperformance is unlikely to stay such a high level for a sustained period of time, market conditions do now favour value managers,” Mr Green said.
The numbers indicated by Lonsec illustrate the picture.
In the 12 months to 31 December 2021, 61 per cent of value funds outperformed the S&P/ASX 300 TR Index, up from a mere 5 per cent over the five years to the end of December 2021.
“This tilt towards value funds is most stark for the rolling year to 28 February 2022, which saw 91 per cent of value funds outperform versus only 46 per cent of growth funds,” the research said.
