Value is starting to emerge in the markets
If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
How are the mighty fallen – the Nasdaq has had its worst week since March 2020 and is down by 28% this year.
Scottish Mortgage is down 41% in the year to date – and is no longer the largest investment trust in the UK – while the Ark Innovation ETF in the US is down 59% in 2022.
Both investments massively outperformed any index you care to choose over the past five years; both have now given up the majority of that outperformance. Just like that.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Look at a few individual stocks and you can see the pain: Netflix is down 70% from its highs, Amazon 40% and Tesla 40%. This, Scottish Mortgage manager Tom Slater told a conference this week, has been the worst start to a year for growth stocks in 90 years.
On the face of it he is absolutely right; look at the way different investment styles have performed so far this year and you can see that growth is very much out of favour. Numbers from Waverton Asset Management show that if you divide the MSCI AC World Index up by style it is what the analysts call “high growth” that is really taking the hit this year so far – down 23.1%. Next up (or down, should I say) is “growth” – down 10.9%.
Look at it by sector and you will see something similar – those that have given us the most growth in value are the ones now suffering the most. This year, consumer discretionary stocks inside the S&P 500 are down 30% – pity the holders of Peloton, down 85% in the past 12 months.
Communication services are down 26% this year and information technology is down 21%.
But compelling as the growth-is-out-of-favour argument sounds, it is not the whole story. We might instead say that this has been the worst start to a year for very expensive stocks in 90 years.
Value stocks are outperforming growth stocks
Look again at the investment style split and you will see that the outperformance comes from value stocks. Waverton says stocks it categorises as “deep value” are up 5.6% on the year, while value stocks are up 2.1%.
Look at the sector breakdown and the stuff that has gone up is not necessarily stuff that is the opposite of growth – it is just stuff that wasn’t expensive before. So energy is up 38% and consumer staples are more or less flat.
Andrew Lapthorne of Société Générale sees it like this too. Disentangle the data, he says, and you can see that it is the most expensive quintile of stocks that is moving most: down 30% from its highs in the US and 20% in Europe.
Compare and contrast as well, the overall performance of the S&P 500 and the FTSE 100: the latter ended last year looking expensive in terms of price/earnings (p/e) ratio; the former ended it fairly reasonably cheap.
But it is the US index which is down 18% so far this year, and the London one which is down by only 3%. The truth is that while it is growth stocks that are falling fastest, they are probably not falling purely because they are growth stocks but because they are – in some cases we can now say were – expensive stocks.
It is not entirely straightforward, of course. Growth stocks have been expensive largely because, with interest rates so low, markets have been prepared to pay for the expectation of high future earnings (jam tomorrow).
This is just maths – and when interest rates rise, or are expected to rise, the dynamic reverses. Investors are prepared to pay less for promises of jam tomorrow, however innovative and exciting it might be, and more for jam now.
Today, inflation is both far too high and far too sticky for comfort – the US consumer price index came in just above expectations at 8.3% this week. And rates are obviously expected to rise.
So the fall in share prices of the big names is not really a comment on the likely success of their businesses. There is some concern about earnings growth falling into a recession, of course – which makes being absolute about anything hard.
But, in general, few people have sold Moderna because they think a rise in interest rates makes its vaccines business less good, or Tesla because they no longer believe in computers on wheels, or Ocado because they no longer think warehouse automation is kind of cool. They have been selling because in a world of slightly tight monetary policy, January’s share prices were wrong; investors have not turned against growth so much as the price of growth. That’s it.
You can blame any losses you might have on inflation, on war, on Chinese lockdowns, or on the US Federal Reserve, or whatever, but you will also know that had we entered this nasty environment with cheap markets they would have been much less likely to spark a bear market.
“Growth” may soon be cheap, too
So will prices go back up to their previous levels? Sure they will, if the underlying companies eventually show the market the money. What they may not achieve is the heroic p/e levels they hit last year.
Earnings now matter. If you want a historical comparison for this, look at January 1969 to June 1970. Share prices had doubled in the previous two years. That made them expensive – the UK All Share Index was on a historic p/e of 23 times against 13 times when the bull market began.
Then, labour relations began to turn nasty, interest rates shot up, with the benchmark yield going from 6% to over 9%, and the UK chancellor decided to do a bit of fiscal showing off by putting up both employment and corporate taxes. Does this sound familiar? The London stockmarket fell 36.6%. Depressing stuff.
There is a glimmer of hope. The past few weeks have done wonders for valuations. William Dinning of Waverton has done the numbers. This week he had global equity markets on an average forward p/e of 15.2 times (it could be lower by the time you read this!).
That is the lowest level since the bear market of early 2020 (when it was 14.1 times). On Dinning’s numbers the US is still at the upper end of its historic, 20-year, p/e range. But take that out and the rest of the world is below its historic average. A few markets – the UK stands out on a forward p/e of 10.4 times – are trading at “meaningful discounts” to historic averages.
That doesn’t mean the bear market is over. A recession, very possible at this point, would hit earnings and so crash the “e” in p/e. But it does suggest that if you are looking for long-term value, some is beginning to emerge. Not long now and you may even be able to buy cheap growth.
• This article was first published in the Financial Time
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
The top stocks in the FTSE 100
After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
By Dan McEvoy Published
-
A junior ISA could turn your child’s pocket money into thousands of pounds
Persuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
By Katie Williams Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated