Several forces are unfolding that indicate the rebound in value will continue, according to a recent article in Advisor Perspectives from Avi Lavi of AllianceBernstein.
The article examines the drivers of the value recovery, with a focus on whether they can continue: “To answer that question,” it says, “we need to first look back at equity market trends before the pandemic.” It notes how the last decade as been “by far the worst period on record for value,” worse even than the internet bubble of 2000 or even the Great Depression.
Here are some key takeaways from the article:
- Value stocks are extremely cheap: “Based on price/forward earnings, the MSCI World Value was 53% cheaper than the MSCI World Growth Index by the end of 2020,” the article reports, adding, “That’s nearly double the 28% average discount that global value stocks have traded at since 1997 and a deeper discount than at the peak of the dot-com bubble in 2000—a period followed by several years of supercharged value outperformance.”
- Even after the recent rally, the discount of value stocks compared to growth is “exceptionally wide.”
- As experienced investors know, extreme discounts could indicate a value trap. But the article argues that the effects of the pandemic “may be a catalyst for change” because of the following five key drivers that could “foster an unwinding of the extreme divergence of value and growth stock valuations in the coming years:”
- “Value earnings and multiples should benefit as economic growth increases and broadens, while visibility into post-pandemic behavior continues.”
- Growth stock multiples could suffer if interest rates normalize and regulatory focus increases on mega cap growth taints in the tech and consumer sectors.
As the country emerges from the pandemic, the article concludes, market conditions have created “what we believe is an unprecedented recovery opportunity for investors willing to initiate or expand allocations to value stocks today.”