The much-heralded shift from growth to value in equity markets has been called into question after the first quarter of 2017 showed signs of a reversion to post-crisis norms.
Value indices, which track out-of-favour stocks, significantly outperformed growth counterparts for the first time in a decade in 2016, with the MSCI World Value index rising 34 per cent compared with 23 per cent for the Growth metric.
The shift was accompanied by fund selectors and managers alike backing value strategies in the belief this would continue, amid suggestions the previous performance disparity had few precedents.
But returns in the first quarter of 2017 have called into question this conviction.
The Growth benchmark has gained 6.4 per cent since the start of the year, compared with a 2.3 per cent rise for the Value index.
The reversal has meant that renowned value managers, such as Investec’s Alastair Mundy and Schroders’ Nick Kirrage and Kevin Murphy, have seen relative returns drop off again after a stellar 2016.
Commentators are split on whether this is merely a blip for value, or a shift back to the trends seen in recent years. Fidelity investment director Matthew Jennings said the extent of value’s 2016 outperformance meant some kind of reversion was always likely.
Many partially attributed last year’s returns to a mass reconsideration from the dominant ‘lower for longer’ interest rate and inflation narrative in the second half of the year. Market thinking was now more nuanced, Mr Jennings said.
“Will [the value] trend continue in the way we observed in the fourth quarter last year? No way,” he said.
“We’re starting from a different place. Expectations are more balanced with a healthy debate – people saying yields will rise and others think it’s rubbish.
“This split means markets [will] be more balanced – compared with the sharp spike in value stocks post November.”
Ritu Vohora, equities investment director at M&G, said that many were waiting for further clarity over the inflation outlook, but added the valuation disconnect between growth and value remained too large to ignore. “There is more capitulation to come,” she said.
Last year’s change in attitudes to inflation also had an impact on bond yields, rises in which tend to correlate with value stock performance.
However, the picture in fixed income has been mixed in 2017 following last year’s sell-off. Government bond yields have fallen in the UK this year despite ticking higher in the US.
Standard Life Investments global market strategist Gerry Fowler said value stocks had not performed as might be expected in relation to bonds this year, but put this down to sector-specific reasons.
“[It] roughly boils down to technology doing well and financials not,” Mr Fowler said.
But Neptune head of client investment strategy Josh Ausden said: “Historically value hasn’t needed rising yields to outperform – it’s simply needed yields not to fall.”
