Tuesday, March 29, 2016

Will value investing stage a mighty comeback?


Market rebounds are very topical at the moment given the performance of asset prices so far this year. Can value investing, a strategy that has notably languished for the past decade, make the biggest comeback in 2016?
Such a prospect is generating buzz among investors who think areas of the equity market, notably energy, miners and materials, are looking very cheap and worth buying now with an eye to reaping long term gains.
According to various measures, global value stocks trade at a discount of 35 per to the broad market, well beyond the average 20 per cent of the last decade says BlackRock. This comes as the S&P value index, up 0.7 per cent so far this year, has outperformed the broad market and more importantly, the S&P growth index, which has fallen 1.3 per cent in 2016.
For the past year, however the S&P value index lags behind its growth rival by around 3.4 per cent, illustrating the frustration of investors who have bought shares on the basis they look cheap in the past year. The burning question is whether some share prices are now truly cheap to power the performance of value further ahead of that shown by growth stocks.
‘’We gave up on value after thinking it was looking good in the past. We have been waiting for momentum to change, and are seeing some positive signs, so we are watching value closely now,’’ says Jack Ablin, chief investment officer at BMO Private Bank.
The brutal market sell-off that has afflicted sectors such as oil, gas, mining and banks has seen many companies across these areas pop up on the radar screens of value investors.
‘’There has been a lack of truly cheap stocks over the last decade for value investors,’’ argues Jason Williams, a portfolio Manager analyst at Lazard. ‘’Significant returns tend to come when stocks are cheap not only on a valuation basis but also on a depressed profit basis. However, things are now changing, as a few sectors are currently trading at large discounts to book value.’’
He says stocks grouped banks, oil & gas and basic resources are currently trading at unusually large discounts to book value. Mr Ablin says: ‘’On thing that is comforting for value prospects is how oil has absorbed a barrage of bad news and risen.’’
The risk beckons, however that cheap stocks can continue getting cheaper. Another way of looking at a low price to book ratio, is that the market doesn’t see something as being under valued, rather that the company and its sector face bigger problems.
There’s no shortage of reasons to think that banks, miners and energy companies face a prolonged period of pain before things really turn for the better. Much hinges on whether the recent rebound in commodities and easing of worries over China and other emerging market economies holds up.
Already we are seeing signs of the bounce since mid-February in sentiment showing signs of fraying. From a fundamental view, many investors note little has changed in recent months.
It remains to be seen whether investors pull away from strategies that have worked well in recent years against the backdrop of aggressive monetary support from central banks.
That has favoured stocks noted for having low volatility, high quality and strong growth prospects and Lazard notes this has ‘’driven extremely strong performance from momentum- and sentiment-orientated investment styles in recent years’’.
As always timing is a critical aspect of successful investing and Mr Williams adds: “The timing of a resurgence in the valuation premium is difficult to forecast, and may begin in one sector before it spreads to the entire market. But for those investors who have found that having exposure to value stocks was a headwind to their ability to achieve strong and consistent alpha, that headwind may soon turn into a tailwind.’’

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