Are value stocks finally back for good?
The Covid-19 vaccine might give value investors the lift they’ve been waiting for, says John Stepek. And the UK is a good hunting ground.


That was quick. In last week’s issue, Jim Mellon told Merryn that investors should buy Lloyds Bank (watch the interview at moneyweek.com/videos). Between that issue coming out on Friday, and Wednesday lunchtime, the share price had risen by 20%. Much as we’d like to claim the credit, the main driver was of course the surging hopes for a vaccine (see page 6). Lloyds was just one of many “value” stocks (companies that look cheap on their “fundamentals”, as measured by various financial ratios) to have rallied sharply on the news that we might soon be able to put the misery of intermittent lockdowns behind us.
Value stocks have lagged growth stocks since at least March 2009 (when they had a short-lived blip of outperformance) and we’ve heard many a call that “this must be the turn”. So is this just another false alarm? Or did poor Ted Aronson, who closed his $10bn value-focused hedge fund AJO Partners only last month, actually call the bottom of this cycle when he threw in the towel?
The case for value
Why has growth trounced value so badly? One factor is that in a low interest-rate, low inflation, weak-growth world, fast-growing companies which promise lots of future profits – even if they make very little today – are at a premium. If inflation is low, then investors are happy to wait for their money. Given the choice between a reliable but barely-growing income stream today, or the promise of a pot of gold at the end of a rainbow sometime in the future, investors are happy to wait for the pot of gold. So growth stocks (which could be described as “long duration” assets – see below) do well. But if inflation picks up, it becomes riskier to wait, and cash-generative value looks more appealing.
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
So if we’re seeing a turnaround now, it’s because the vaccine news means markets expect economies to open up faster, which means better economic growth, and potentially higher interest rates and inflation to go along with it. Does that seem a reasonable bet? We’d argue that it does. If anything can generate inflation, then huge pent-up demand combined with free-spending governments is surely it. So what should you invest in? The UK is a good option for value. Despite the recent surge in airlines, banks and oil stocks, there’s plenty of room for more. We looked closely at the value-focused Law Debenture (LSE: LWDB) investment trust in last week’s issue and we’re very glad we kept it in our portfolio. If you prefer pure passive, a plain old FTSE 100 tracker will give plenty of exposure to value. And if we’re wrong? Hang on to your holding of Scottish Mortgage (LSE: SMT), just in case – but think about rebalancing.
I wish I knew what duration was, but I’m too embarrassed to ask
“Duration” is a measure of risk that usually relates to bonds. It describes how sensitive a given bond is to movements in interest rates. Think of the relationship between bond prices and interest rates as being like a seesaw: when one side (interest rates) goes up, the other (in this case, bond prices) goes down.
Duration (you can find the measure in the fact sheet of most bond funds) tells you the expected percentage change in a bond’s price in response to a one percentage point (100 basis points) change in interest rates. The higher the duration, the higher the bond’s “interest-rate risk” – that is, the larger the change in price for any given change in rates. This is also known as “modified” duration.
Duration can also refer to the weighted average length of time (in years) it will take to recoup the price paid for a bond in the form of income from its coupons (interest payments) and the return of the original capital. So if a bond has a duration of ten years, that means you have to hold it for ten years to recoup the original purchase price (this is also known as “Macaulay duration”). In practice, both measures of duration return very similar values. So in the above example, the duration value of ten also indicates that a single percentage point rise in interest rates would cause the bond price to fall by 10%.
As a rough guide, the duration of a bond increases along with its maturity – so the longer a bond has to go until it repays its face value, the longer its duration. Also, the lower the yield on the bond, the higher its duration – the longer it takes for you to get paid back. All else being equal, a high-duration bond is riskier (more volatile) than a low-duration bond.
When applied to other assets such as equities (as above), a “long duration” asset refers to the fact that the payback period is lengthy (it takes a while to earn your original investment back) and thus the asset is sensitive to movements in interest rates.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
-
Money tips for the end of the tax year
The tax year will end on 5 April, and your annual allowances for 2024/25 will disappear with it. Here’s how to get your finances in shape
By Katie Williams Last updated
-
India's stock market decline wipes out $1.3 trillion in market value
More than $1 trillion has been wiped off from India's stock market after investors turn to China. Has the emerging-market darling hit rock bottom?
By Alex Rankine Published
-
India's stock market decline wipes out $1.3 trillion in market value – can investors stay optimistic?
More than $1 trillion has been wiped off from India's stock market after investors turn to China. Has the emerging-market darling hit rock bottom?
By Alex Rankine Published
-
Pensions revolution: how to profit from the trends shaping the UK pension system
The UK pension system is one of the biggest in the world. Big changes are under way, says Rupert Hargreaves
By Rupert Hargreaves Published
-
Will Trump force the Fed to lower interest rates?
Opinion Markets are ignoring the risk that Donald Trump forces the central bank into reckless interest rate cuts
By Cris Sholto Heaton Published
-
Large cap stocks start to struggle – is it time for investors to reassess their focus?
Buying quality large caps worked very well last decade. A more volatile world will be a bigger challenge for these star stocks, says Cris Sholto Heaton
By Cris Sholto Heaton Published
-
How to generate income with fixed-interest investments
Public debt is overvalued, but other fixed-interest investments now look like a bargain, says Max King
By Max King Published
-
Three top-notch Taiwanese companies cashing in on the advent of AI
Opinion Eric Chan, investment director and co-manager of the Aberdeen Asian Income Fund, highlights three potential Taiwanese winners in the technology industry
By Eric Chan Published
-
Weight-loss drugs could revolutionise the economy – the investments to buy now
The new generation of weight-loss drugs are a boon for the overweight, but they also promise to change our relationship with food and revolutionise the economy
By Dr Matthew Partridge Published
-
Find tomorrow’s Asian giants while they are still smaller companies
Opinion Nitin Bajaj, portfolio manager of the Fidelity Asian Values trust, picks three Asian companies to invest in.
By Nitin Bajaj Published