The long-awaited return of value stocks

For a few years we’ve been wondering when the gulf in valuation between “growth” stocks and “value” stocks will close. It might finally be happening, says Merryn Somerset Webb.

It’s finally happening. For a few years we’ve been looking at the valuation gulf between “growth” and “value” stocks and wondering when it might close. This distinction is silly in some ways – presumably everyone who buys a growth stock thinks they are buying for less than it is worth, and thus getting value. But it’s still a reasonable way to divide up stocks if you want to explain the last few years – everything offering excitement, a good story and potential for fast growth has been bought pretty much regardless of price. Everything a bit staid, old hat or out of fashion has been ignored – again pretty much regardless of price. 

This week things look a little different. In the last six weeks or so value has beaten growth by around 10%, the Nasdaq has been more often in the red than not, and 40% of shares in the index are 50% off their one-year highs, with those that aren’t profitable doing the worst. For a hint of just how bad things are for believers in speculative tech investment, look to ARK Invest’s flagship exchange-traded fund (ETF). It’s down 15% this year alone. Confidence seems to be falling even among the management of the stocks it holds: “insider sales in these companies have been... well above historic norms” in recent months, reports the Financial Times. 

Meanwhile, shares in companies that many have dismissed as being in long-term structural decline have been rising. Shell is up nearly 6% year-to-date and 23% in the last six months. The great rotation might actually be upon us. There are many implications to this – not least the fact that we will, I think, all turn out to own many more growth (“long duration”) stocks than we know: having performed so well for so long, they dominate most passive and active portfolios. But one interesting effect might be on the environmental, social and governance (ESG) bandwagon. 

Bad news for ESG

The great bull market in exciting stories has been fabulous for stocks that it’s easy to justify holding in any ESG portfolio – and not so fabulous for anything a bit grubby that is harder to make excuses for. So you will have heard plenty about how ESG portfolios at best outperform non-ESG ones and at worst perform much the same (the do-goodery comes for free). That reassurance has been one driver behind the shift into funds with an ESG bent: 75% of the money flowing into funds in the UK last November went into some kind of responsible fund, according to the Investment Association.

But what will happen now? As JPMorgan notes, much of the ESG difference came from renewable energy stocks outperforming old energy stocks. If traditional energy now outperforms, do-goodery will no longer come for free. Indeed, 2022 might be the year we find out that the main driver of long-term returns is not stories, greenwash, or feelings – but the price you pay. The lower the better. Luckily, there are still some investments you can buy at what looks like a bit below the right price. In this week's magazine, Luke Hyde-Smith (who’ll be on the podcast soon) looks at assets to hold in a negative real interest-rate world. We also look at some investment trusts trading on a discount (one is Temple Bar – whose managers discuss their top picks on this week’s podcast). Finally, uranium – if anything can oust fossil fuels quickly, it’ll be nuclear power. You may want to invest while the rest of the market is getting used to the idea.

Recommended

Where will house prices go in 2023?
House prices

Where will house prices go in 2023?

We explore what could happen to house prices in 2023 as the market continues to slow down.
24 Mar 2023
What is inflation and how will it affect you?
Inflation

What is inflation and how will it affect you?

There has been much talk of inflation recently. But what exactly is it and what does it mean for our money?
24 Mar 2023
3 success stories set for long-term growth
Investments

3 success stories set for long-term growth

A professional investor tells us where he’d put his money. This week: Felix Wintle, manager of the VT Tyndall North American Fund, selects three favou…
24 Mar 2023
Share tips of the week – 24 March
Investments

Share tips of the week – 24 March

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages
24 Mar 2023

Most Popular

5 top UK tech stocks
Investments

5 top UK tech stocks

The UK market has never been considered a fertile hunting ground for tech stars. But there are plenty of promising companies beyond the old economy, s…
23 Mar 2023
Where will house prices go in 2023?
House prices

Where will house prices go in 2023?

We explore what could happen to house prices in 2023 as the market continues to slow down.
24 Mar 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Ofgem’s price cap is now predicted to fall below £2,000, based on average typical use, from July, for the first time since 2022. We have all the detai…
21 Mar 2023