The last 12 months have seen style factors significantly influence global market performance, with the momentum factor having been a major contributor to performance in global equities, according to Reece Birtles, chief investment officer at specialist equities investment manager Martin Currie.
However, Birtles said investors are right to be concerned about recently distorted market prices driven by AI hype and large-cap stocks, reminiscent of the tech bubble.
“The momentum leadership, particularly from the ‘Magnificent Seven’ and large-cap market concentration, has created market exuberance. US market P/E multiples suggest unrealistic assumptions about sustained high profit margins and return on equity,” he said in a recent market outlook.
“Our analysis of the macro story paints the picture of things at extremes, including valuation dispersions. The market’s preference for growth and momentum has widened valuation gaps, making growth stocks more expensive and value stocks cheaper than normal.
“The 80–20 spread, which measures dispersion between the cheapest and most expensive parts of the Australian market, is wider than average. These conditions suggest a potential outperformance of value stocks as extremes unwind to more normal levels of dispersion.”
Conceding that the timing of style cycles is always difficult to predict, Birtles affirmed that present conditions still favour value investing, whether as a standalone strategy or within broader multi-asset portfolios.
“Value-style stocks are cheap, while growth stocks, typified by the likes of the Magnificent Seven and Nvidia, remain overpriced. As valuation spreads narrow, value style strategies offer a strong starting point,” he said.
As such, Martin Currie is keeping on the pulse of undervalued defensive names that can weather economic downturns and grow despite resilient inflation.
“Stocks facilitating energy distribution such as Worley and Ventia Services Group are attractive, too. AGL Energy, where the energy transition is creating a shortage of electricity production, and Flight Centre Travel Group, where the market is undervaluing cost efficiencies and margin leadership, are all worth keeping an eye on,” Birtles said.
Speaking at the 2024 Pinnacle Investment Summit last month, Firetrail managing director Patrick Hodgens echoed concerns around the “overpriced growth trap”, emphasising that cyclical growth companies – those facing the consumer or the economy – are particularly vulnerable to market movements.
“If the consumer or the economy is slowing, as we’re experiencing today, these companies are susceptible to earnings downgrades,” Hodgens told attendees.
“And we know the market punishes earnings downgrades. Share prices follow earnings at the end of the day.
“We want [Firetrail’s] portfolio managers to look at every segment: value segment, growth segment, and also the quality segment. The reason why we do that is it’s very difficult to predict which one of these styles is likely to outperform in the next three or four years.”
Looking at value stocks, Hodgens said the investment manager distinguishes this corner of the market into two categories: “unloved” value and “compelling” value.
The former, which Firetrail estimates make up about a quarter of the ASX 200, includes those that the market has yet to recognise as undervalued. The ones worth dipping into, he clarified, must also demonstrate the potential for earnings improvement.
“We are very happy to invest in those companies, but we have to see an improvement in earnings or a catalyst that will kickstart the share price within 12 months. It has to be a fairly short period,” Hodgens said.
“Part of the reason for that is because there’s only around 30 cents of every active dollar chasing value companies these days. There’s just not enough money chasing these companies. So, if that catalyst is too far away, these companies will remain cheap.”
