Banking on cheap stocks to outperform shares of faster-growing companies has been a losing proposition for years. Plenty of fund managers say they expect that to change in 2022, thanks in part to the prospect of higher interest rates.
Value — equities that are inexpensive relative to earnings — was the most popular investing theme for this year among 106 institutional investors informally surveyed by Bloomberg News in the first half of December. About a fourth of them said cheaper, old-economy stocks such as banks are the place to be, over ideas such as green energy, growth, U.S. technology and emerging markets.
Growth stocks around the world have returned 22% annually including dividends over the past five years, versus 9.8% for value, indexes compiled by MSCI Inc. show. There was a glimmer of hope that 2021 would be different, but the two styles ended up in a dead heat, returning about 20% each. The U.S., though, was a different story: There, growth stocks again trounced value.
Now some of the world’s biggest investors, including BlackRock Inc. and Franklin Templeton, say value’s moment has arrived.
“You do want to hold value in the long term because we will go back to normalcy,” said Andrew Ang, the head of factor investing strategies at BlackRock.
Investors’ vote in favor of value came just a few days before the Federal Reserve made the environment more conducive for the style by signaling inflation is its biggest enemy and that it expects to raise interest rates next year at a faster pace than anticipated. Higher rates reduce the value of companies’ future earnings, weighing especially on shares of fast-growing companies with much of their profits in the years ahead.
“During 2022, we’re likely to see monetary policy become tighter to tackle higher levels of inflation and this may act as a headwind to higher-growth parts of the market such as technology,” Dan Boardman-Weston, chief investment officer at BRI Wealth Management, wrote in a note. That “should benefit more value-orientated sectors such as banks and so we could see a reversal of fortunes.”
The coronavirus pandemic clouded the outlook for investing for much of 2021. The MSCI World Value Index outpaced its growth counterpart in the first half as the vaccine rollout accelerated, encouraging investors that the economic expansion had further to run and would lift even laggard stocks. That initial surge got spoiled by the spread of the delta variant, while growth stocks managed to recover from their lows amid accommodative central bank policies.
Many conditions needed for value’s rebound — an accelerating economy, a regulatory crackdown on high-priced tech companies and rising inflation — were all there in 2021 and yet it dropped to a record low against growth in November. And now the spread of the omicron variant is leading to a record number of coronavirus cases and fresh lockdowns in many parts of the world, the same environment that helped fuel big gains for growth stocks throughout much of the pandemic.
Still, after five years of underperformance for value, investors are hoping the sixth year might be the charm.
Within value, industries that are benefiting from specific catalysts and increased earnings estimates should fare the best, according to Morgan Stanley strategists led by Graham Secker. They cited the auto industry and shares of banks and energy companies, both of which should see rising expectations for profit growth.
The acceleration in inflation amid a rapidly recovering demand and supply chain issues “creates a very different starting point for 2022 versus 2021 which may create opportunities in quality value stocks,” said Stephen Dover, chief market strategist at Franklin Templeton Investment Institute.
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