Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 408

Will the drought break for value stocks continue?

The drought has broken for global value investors, but can the recovery continue? This article outlines the scale of the bounce back for value-style stocks and considers whether it is set to run further.

Why value stocks were in the wilderness

A growth stock is a share in a company that is anticipated to grow at a rate significantly above the average growth for the market. A value stock is a company trading at a lower price than justified based on the company's fundamental performance. For many years following the GFC, value underperformed growth.

There main possible explanations for this include:

  • Low real interest rates. Low interest rates imply low discount rates for discounted cash flow calculations, artificially inflating longer-dated cash flows which are typically associated with growth stocks.

  • Build-up of intangible assets. Using simple valuation metrics tends to ignore the impact of modern intangible assets like research and development (R&D) and brand value, which tend to be associated with tech or consumer discretionary names. Firms that invest heavily in R&D and brand value look expensive when the price is measured against tangibles like book value or total liabilities.

  • Low inflation. While global economic growth has been satisfactory, productivity growth has been poor and inflation has been depressed (or at the low end of expectations). This means that nominal interest rates have also remained low.

  • Technological shift. The period since the GFC has been dominated by a new paradigm of technological developments, most notably in communications, consumer services and the application of new technology to older problems like transport and power supply. Firms in this space have been much more successful than 'old school' firms – bricks and mortar retail, transport and entertainment have all suffered. These newer firms have often traded on excessively high valuation metrics, making older firms appear cheaper.

A market shift

After languishing for over a decade, global value stocks returned an average 10.3% in the first quarter of 2021, compared to growth stocks at 1.6% (MSCI AC World ex AU Value and Growth, 1 January to 31 March 2021), after a long period of relative underperformance.

The significant shift in market dynamics can be seen in the rotation of tech and communications names out of the top 20 performers, to be replaced by value-style industrials, energy and financials. For example, between April and September 2020, Tesla, Zoom and PayPal were among the best performers, while from October 2020 to March 2021, brands like General Electric, Citigroup and John Deere saw the strongest gains (see appendix).

Chart 1: MSCI ACWI Total Returns by Company

Source: MSCI – April 2021

However, the recovery is starting from a low base.

Over the past 40 years, value and growth styles of investing have competed for dominance, and in the last decade, growth has convincingly won. While the recent rebound is welcome, it has hardly made a dent in terms of recovery, as Chart 2 shows.

Chart 2: Value vs Growth Returns

Our research also illustrates how the gap between value and growth stocks has increased in recent years. Since 2014, growth names have more than doubled as a proportion of the benchmark weight, while value names have approximately halved.

Chart 3: Growth and Value companies as a percentage of MSCI World

Source: Realindex, Factset, MSCI. Data as at 31 March 2021.

Chart 4 outlines the average price-to-book ratio of all stocks in the MSCI World, sorted into quintiles (by price to book). For example, the blue line shows the average price-to-book of the 20% most expensive names in the universe. This shows that the spread in valuations has been caused by the expensive names becoming more expensive, not the cheap names getting cheaper.

Chart 4: MSCI World Growth and Value price-to-book by quintile

Source: Realindex, Factset, MSCI. Data as at 31 March 2021.

Another insight from this data is that despite the recent rebound in value, the spread is still large, and the most expensive names are still very expensive in historical terms. As such, the rebound has merely ‘scratched the surface’, making it more likely that further gains for value are possible.

If we see the runaway performance of growth as an unsustainable trend that has run its course, then we are more likely to see the value rebound as a trend that is here to stay.

The inflation factor

The inflation and interest rate environment could also influence the performance of value stocks. With bond yields indicating that inflation is picking up globally, and that real interest rates may follow, these types of stocks are set to benefit.

That’s because they are known to be ‘short duration’ in nature – their cash flows are near term. Growth stocks, on the other hand, are known to be long duration. In a world of low interest rates, long dated cash flows are inflated, which will inflate the value of growth stocks when compared to value stocks.

However, when interest rates rise, growth stocks’ valuations will decrease much more quickly, for the same reason. It then follows that an increase in inflation and interest rates will hit long duration names harder. In other words, value will outperform - and this is indeed what we have seen recently.

Analysts betting on value

We also looked at the sentiment among sell-side analysts to infer whether the value rebound is set to continue. The chart below plots the correlation of analyst revisions with our composite value factor since the start of 2018. Until the second half of 2020, analyst revisions were negatively correlated with value – that is, growth stocks were being upgraded, or value stocks were being downgraded, or both.

Chart 5: Correlation of Analyst Revisions

Source: Realindex and Factset, April 2021

However, beginning in August 2020, a distinct change has been observed. We now see analysts moving away from the growth-upgrade/value-downgrade cycle, to the opposite – upgrading value stocks and/or downgrading growth stocks. The analyst community is a strong predictor of future market leadership, and this shows that the shift toward value is well underway.

A positive outlook

Overall, our analysis concludes that the signs are good for a continued value revival, as there is a lot of room for value stock prices to catch up. Inflation and interest rates may be ticking up, which normally creates positive conditions for value stocks. And finally, it appears that the ‘smart money’ is on value, with the analyst community looking more favourably on them. We think the signs are good for value investors.

 

David Walsh is Head of Investments at Realindex Investments, a wholly owned investment management subsidiary of First Sentier Investors, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

For more articles and papers from First Sentier Investors, please click here.

 


 

Leave a Comment:

RELATED ARTICLES

Inflation: friend or foe of Value stocks in 2022?

10 big investment themes to watch in 2022

Will value stocks benefit from the market's inflection point?

banner

Most viewed in recent weeks

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Latest Updates

Investment strategies

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Shares

Why the ASX needs dual-class shares

The ASX is exploring the introduction of dual class share structures for listed companies. Opposition is building to the plan but the ASX should ignore the naysayers and bring Australia into line with its global peers.

The state of women's wealth in Australia

New research shows the average Australian woman has $428,000 in net wealth, 40% less than the average man. This takes a deep dive into what the gender wealth gap looks like across different life stages.

Investing

The two most dangerous words in investing

Market extremes are where the biggest investment risks and opportunities lie. While events like this are usually only obvious in hindsight, learning to watch out for these two words can alert you to them in real time.

Shares

Investing in the backbone of the digital age

Semiconductors are used to make microchips and are essential to a vast range of technology and devices. This looks at what’s driving demand for chips, how the industry is evolving, and favoured stocks to play the theme.

Gold

Why gold’s record highs in 2025 differ from prior peaks

Gold prices hit new recent highs, driven by a stronger euro, tariff concerns, and steady ETF buying – all while the precious metal’s fundamental backdrop remains solid amid a shifting global economic landscape.

Now might be the best time to switch out of bank hybrids

In this interview, Schroders' Helen Mason discusses investing in corporate and financial credit securities, market impacts of tariffs, opportunities for cash investments, and views on tier two and hybrid bonds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.