Value investing is poised for a comeback this year, as the Fed plans to raise interest rates further in its effort to cool inflation, contends an article in Yahoo! Finance. That shift could bring about renewed attention to company fundamentals and value investing, Luke Templeman of Deutsche Bank wrote in a note last year. As stimulus money drains away, equity markets will see less money flowing in, and higher interest rates could push bond yields to rise. In that case, “investors will have options elsewhere in bond markets and other rate-sensitive investments that have been ignored in recent years,” he wrote.
Growth stocks were able to outperform value stocks for so long thanks to low interest rates, which the Fed kept low for years following the 2008 financial crisis. That fueled an era of cheap money, a healthy portion of which flowed into equity markets, the article explains. Much of that money came through passive funds that bought the index, which made stocks across the board move up and down together, whether or not the underlying companies’ profits were viable, the article contends. But now, with growth stocks hobbled by higher interest rates cutting into their future profits and therefore their current value, fundamental value investing has the potential to see a resurgence. While Templeman doesn’t believe the “overall equity markets will crash,” he does see “a reordering within equity markets” as investors shift away from growth stocks and turn more and more to value stocks over the coming year.
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