Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 217

The potential for a value revival

The Danish philosopher Søren Kierkegaard observed that, “Life can only be understood backward, but it must be lived forward.” With the benefit of hindsight, events of the past often seem rational, even inevitable, yet the present is always fraught with uncertainty. This could also be said about investing.

Today’s investment climate could be summed up as cautious and noticeably bereft of conviction. While global equity markets have more than doubled from GFC lows, investors remain concerned about central bank policies, currencies and commodities, among other issues.

Even so, our company’s conviction in value investing is strengthening as we try to “understand the market backwards”.

What is value investing?

Value investing is a strategy where stocks are selected that trade for less than their intrinsic values. Value investors seek out stocks they believe the market has undervalued. These differ from growth stocks, which are companies whose earnings are expected to grow at an above-average rate relative to the market.

Value investors believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated.

Valuation gap is extreme

Value stocks remain historically cheap relative to growth stocks. In fact, the valuation gap between value and growth stocks on a Price to Book value (P/BV) is at an extreme not seen for some time (see chart below).

Investors would have to go back to the height of the ‘dotcom bubble’ in 2000 to find such extremes. Back then, interest in tech stocks was enormous, based on their perceived growth potential. Today, it is the consumer staples sector that is attracting market focus as investors look for growth stocks that offer the perception of safety and stability in an uncertain environment.

Value on the rebound

One of the stronger catalysts for a value revival is rising interest rates. In the past, value cycles have occurred when rising interest rates have corresponded with a strengthening economy, although some argue it is the stronger economy and inflationary pressures that were the real drivers of the value revival. Today, however, global economic growth is moderate and deflationary pressures persist.

While value can be pro-cyclically correlated to the economy, this isn’t always the case. For example, investors waiting for an improving economic cycle would have missed the value upturn in 2000. Investors fleeing value in anticipation of economic weakness would have missed value’s outperformance during the recession of 1981-82. In each of these instances, we believe stocks simply became too cheap and a reversion to the mean prompted a value rally.

Rather than economic growth, we consider valuation of stocks a far more accurate predictor of future returns and a value recovery. When it comes to value, today’s valuation starting point is distinctly compelling.

Value moving beyond 'the usual suspects'

Since the GFC, value stocks have been primarily concentrated in either the resource sectors such as energy and materials or rate-sensitive sectors such as financials. For many, being a value investor has therefore meant taking on commodity risk or interest rate risk.

Recently, however, value has proliferated beyond just a few deep cyclical sectors to across the broad market. For example, value is just as cheap today within pharmaceuticals and biotechs as it is within financials and energy, as shown in the chart below.

The long-term trends for pharma and biotechs are encouraging given the ageing world population and increased wealth in emerging markets. Regulatory reform and drug pricing are clouds hanging over the industry but will not impact all companies in the same way. The best way to deal with a tough price environment is to innovate. We are invested in companies working on drugs for immune-oncology, gene therapy and Alzheimer’s which have huge potential. Current concern and uncertainty is allowing us to buy new stocks at what we believe to be a discount, and this is where the advantage of having a long-term horizon and patience comes in.

Long term view helps pick a bargain

Uncertainty is a fact of life and the road ahead is rarely obvious. One way to deal with uncertainty is taking a longer-term investment horizon. Many of the macro and political variables that drive markets in the short term are unforecastable with any reliable degree of certainty. However, long term valuations move reliably through cycles, as do economic variables like commodity prices and interest rates. Quantifying the potential impact of different scenarios on each of our holdings’ prospects and earnings and contrasting them with the company’s valuation allows us to judge whether we have identified a value bargain.

 

Peter Wilmshurst is Portfolio Manager of Templeton Global Growth Fund Ltd (ASX:TGG) plus a number of Templeton Global Equity Group's global portfolios. This article is general information and does not consider the needs of any individual.


 

Leave a Comment:

RELATED ARTICLES

Reece Birtles on selecting stocks for income in retirement

Inflation: friend or foe of Value stocks in 2022?

The growth outperformance myth

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

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.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

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.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

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.