Throughout growth’s more than decade-long run of dominance, market prognosticators have often called for a reversal of value’s fortunes. Pockets of growth excess have been apparent, from eye-watering valuations for unprofitable tech companies to SPAC euphoria to record retail participation (and leverage) in markets. Meanwhile, value stocks have been historically cheap. As Chris Grohe, associate director at QIG Equity Research, calculated recently, the cheapness of US value stocks relative to growth was at its 98th percentile as of November 2021. In Europe, that number was the 92nd percentile. In Asia (ex-Japan), it was the 91st percentile.
Does the violence of last week’s rotation suggest regime change is upon us and a sustained reversal in the performance of growth versus value is underway? In recent days, this question inspired one of the richest debates across Wellington’s breadth of expertise in memory. A few of the key questions we considered: Will inflation moderate or continue to exceed expectations? Will central banks miscalculate the speed of tightening? Do we need to reassess our valuation metrics — temporarily or permanently — given modern market structures?
The debate was a powerful reminder of why we have no CIO. Consensus should not be the goal when so many unknowns remain. Our bottom-up debate leverages expertise across our investment platform on an equal footing. And from that debate emerges an opportunity set —actionable ideas undeterred by a single, top-down perspective.
As we have written often in these pages, today’s macro uncertainty is likely to result in elevated market volatility. Last week was a glimpse of indiscriminate, factor-driven buying and selling that could generate exploitable price disconnects, whether growth or value stocks. Equity Portfolio Manager Dirk Enderlein summed up the opportunity best: “This type of extreme setup does not happen very often during one’s career and it usually offers an enormous opportunity for alpha generation for our clients.”
Value’s resurgence did not begin last week. By many measures, value outperformed growth in 2021. However, that came after an unprecedented run of growth dominance throughout the 2010s, culminating in 2020, which saw “the largest outperformance by growth EVER in the data going all the way back to the beginning of the data series in 1927,” as Equity Portfolio Manager Sean Kammann noted last week. Kammann applied the Fama French asset pricing model to quantify the dynamic. His analysis is striking:
Equity Market Outlook
In our Equity Market Outlook, we offer a range of fundamental, factor, and sector insights.
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