Could the Covid crisis hold a silver lining for cheap value stocks?

Value investing strategies have had a dreadful six months – but the crisis could be a catalyst for them to turn around.

Offshore oil rig
Energy stocks are one of the most attractive value sectors to back in a recovery
(Image credit: © Getty Images/iStockphoto)

The coronavirus crisis has been painful for everybody, but value-focused fund managers have particular reason to feel miserable. After a decade in which growth strategies (those that look for companies with higher earnings growth) generally beat value approaches (investing in companies that look cheap on metrics such as price/earnings, price/book or dividend yield), value investors expected to be rewarded in the next bear market. Overpriced growth stocks would be crushed, cheap ones would shine and their patience would be rewarded.

To say that this has not happened is an understatement. The gulf between value and growth this year is staggering. Using indices compiled by MSCI, growth stocks beat value ones in America by 28 percentage points in the six months to the end of June. In Europe, Japan and Asia ex Japan, the gap was around 15-17 percentage points.

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.