The tide has now turned for value stocks both locally and globally, active equities investment manager Martin Currie has suggested, and Australia’s value-tilted market is particularly well placed to outperform moving forward.
The firm said that there had been a “meaningful reversal” in the relative performance of value and growth since the third quarter of last year with a severe price reversion for growth stocks.
“The shift in relative performance has correlated closely with strengthening momentum behind the reopening of global economies, as COVID-19 restrictions have been progressively eased and borders have begun to reopen,” said Martin Currie Australia CIO, Reece Birtles.
“This has been associated with an acceleration of key inflation measures, as well as expectations for the normalisation of extremely loose monetary policy settings.”
Martin Currie said that the local market was particularly well placed to outperform amid the improving economic environment versus the US and other markets globally.
“The Australian equity market is notably value tilted, with a large weighting to very high-quality financials, which will benefit from rising interest rates, and materials or resources, which will benefit from supply chain limitations or disruptions, and growing momentum behind the global push toward net zero,” said Mr Birtles.
In comparison, he noted that the US market was more leveraged to the growth thematic, as major technology stocks account for over a quarter of the total market capitalisation of the S&P 500 index and eight of its top ten constituents by weight.
“We would note that thematic influences associated with these differences have already driven a clear performance dispersion between the two markets over the year to date, with Australia’s greater value orientation supporting outperformance relative to the US and other global markets,” Mr Birtles said.
“With growing momentum behind the rotation back to value, we see meaningful opportunity for this relative outperformance to continue.”
Martin Currie said that its analysis suggested ongoing material upside for value even after accounting for the recent uptick in performance.
“Our proprietary methodology shows that the fair value gap between the most attractive value-style stocks and the broader market, or what we call the ‘Value Spread’, remains at a notably stretched level versus history,” said Mr Birtles.
“Despite the sharp reversion of relative performance, the spread remains the widest it has been since early 2012, highlighting that as the spread narrows, the return opportunity that our model estimates is still very significant.”
Mr Birtles also pointed out that changes to the underlying drivers of inflation had been occurring in recent times. He explained that, during the past decade, non-tradables inflation has typically been stronger than tradables inflation.
“This strong demand for services had meant that many growth-style companies were able to maintain quite healthy earnings while their input costs fell, supporting the outperformance over the typical value-style companies levered to tradables inflation,” he said.
“The recent inflationary spike that we have seen has reflected a swing back to tradables inflation, with increasing goods and commodities prices helping to generate momentum behind the move. Increasing goods costs with relatively static input costs will help to create a beneficial environment for value stocks such as resources companies and other goods producers, strengthening the tailwind for value’s relative outperformance going forward.”
