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…

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG