After more than a decade of severe underperformance, value stocks have experienced a sudden revival over the past month, with many much-hyped growth companies suffering sharp losses.
The growth sell-off was extreme - with ‘momentum' stocks diving 10% over the course of a three-day period in the early part of September. In contrast, the previously disregarded value stocks climbed 7%. This was the largest such shift in three decades.
However, this is not the first time in recent years investors have proclaimed the return of value - often synonymous with a pickup in global growth. Below, four investors discuss whether this is merely another false dawn or whether the winners and losers of the stock market are truly being redrawn.
Erik Knutzen, chief investment officer - multi-asset class at Neuberger Berman
As evidence of what is being called the ‘momentum massacre', look no further than the sudden underperformance of growth stocks versus value stocks since the start of the month. It has been as severe as we have seen for a decade.
These rotations could be explained in simple terms. Investors will pay more for growth stocks if they fear a broad slowdown in the economy. They will pay more for the steady income streams of defensive stocks if they fear a slowing economy is going to push down bond yields. A reversal of these trends would be consistent with expectations for higher growth, higher inflation and a reduction in geopolitical risk.
While economic and geopolitical news may have become modestly more positive lately, we are cautious as to whether this justifies the startling market reversals. New US-China trade talks have been scheduled, additional tariffs have been postponed and Brexit is potentially delayed again, yet the major issues around these risks remain unresolved.
We will need to see more to sustain the market's new trends. Two weeks do not make a recovery, and the likelihood of recession is still higher now than it was three or six months ago. However, traders appear to have recognised the prospect of a soft landing is not as remote as they were pricing for in the pessimistic, illiquid summer markets.
Andrew Beck, portfolio manager of the Nordea 1 - North American Small Cap Fund
The plight of the value style of investing relative to growth has been well documented, but what many market participants may be underappreciating is the sheer length of this era of underperformance.
In the US, value has lagged relative to growth since 2006, which is by far the longest period on record. In comparison, the second lengthiest phase of underperformance for value was almost half this duration - between 1993 and 2000. The key driver of growth stock outperformance has been the weak economic growth witnessed during the current expansion - which is also at record length.
As long as growth remains scarce, it is unlikely the value style can regain the ascendency. However, there is only so long investors can continue to ignore today's valuation gap - with growth stocks trading at multiples significantly wider than value counterparts. While valuations are still below historical extremes, such as during the TMT bubble, we are highly unlikely to be still talking about a growth dominance in the coming years.
We see numerous compelling opportunities - particularly within the industrials, communication services and technology sectors. An overweight position in technology may be surprising for a value-biased investor, but not all tech stocks are priced at extreme multiples like the FAANGs - with many mature, high-quality companies in the sector trading at reasonable discounts.
Tony Yarrow, co-portfolio manager of the TB Wise Multi-Asset Income Fund
In thirty-five years as a professional investor, I have seen a large number of value opportunities, but three stand out - the undervaluation of ‘old economy' shares in the winter of 1999-2000, the distressed pricing of whole swathes of the market in early 2009 and the priced-to-go-bankrupt valuations of much of the UK today.
Investors who are considering selling UK assets in the view things get even worse might like to consider just how much bad news is already priced in. On 16 August, Cheung Kong announced an agreed takeover of the brewer and pub owner Greene King at a premium of 50%.
This transaction confirms rational investors are prepared to pay vastly above current market values for the long-term returns on offer. It is also worth noting Cheung Kong has not bothered to wait for clarity on the outcome of Brexit.
Despite the gloom, prospects for the UK consumer are surprisingly positive. Not only are more people in work, but they have more money to spend. It would not surprise us if we saw a kind of feeding frenzy in depressed UK assets. We have invested an unusually high proportion of our TB Wise Multi-Asset Income Fund in the UK because of the growing disconnect between our estimates of the values of these assets and the prevailing market valuations.
Chris Hiorns, portfolio manager of the EdenTree Amity European Fund
The current valuation gap between growth and value has only previously been seen during the heady days of the TMT bubble. However, over the long term, I do not believe this gap is sustainable.
By investing in a diverse portfolio of value stocks from a wide range of different sectors, on price-to-earnings ratios of 10-12x and yields of more than 5%, investors should be able to significantly outperform growth over the next few years.
Over a short-term time horizon, whether value can build on the outperformance we have seen since the start of September may depend on whether the uncertainty caused by the geopolitical backdrop of Trump's trade wars, Brexit and threats to the global oil supply dissipates, the threat of global recession recedes and bond yields continue on an upward momentum.
Still, whatever happens in the short term, from a longer-term perspective, value has rarely appeared so attractive compared to growth, or indeed to other classes such as bonds or property.