Value Stocks Are Stuck In A Rut

Value Stocks Are Stuck In A Rut
Reda Farran, CFA

over 2 years ago1 min

Value stocks – those with lower prices compared to their profits – still can’t catch a break, despite a recent reversal in the bond market.

The blue line above shows the performance of global value stocks relative to their growth counterparts – companies with fast growing income. And as you can see from the graph, value’s relative performance has closely followed global government bond yields (the white line). But since July, bond yields have marched upwards while value stocks’ relative performance has headed straight down.

Much of the reason why comes from the fact that the rise in yields is being driven by a torrent of government bond sales in the US and Europe, rather than rising global growth expectations. A flood of government sales increases the overall supply of bonds, which pushes down their prices and increases their yields.

That’s not much help to value stocks, which are more economically sensitive and tend to do well when global growth expectations are rising. In such a scenario, growth stocks also tend to underperform which further increases the relative performance of value versus growth. That’s because when growth is scarce, investors flock to the few stocks that can grow their earnings. But when global growth expectations are rising, the relative appeal of growth stocks goes down and investors rotate into other stocks.

So while it might’ve been easy to just say in the past that value stocks should be outperforming growth stocks as bond yields rise, the underlying reason behind rising bond yields matters. And until global growth expectations start heading upwards, value stocks could remain stuck in a rut…



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