While the dominance of growth stocks has intensified during the coronavirus pandemic, an article in ETF Trends argues that the “dynamics are changing and the environment is now looking more favorable for value investing.”
The article outlines the following three scenarios that could favor the value investor:
Post-coronavirus economic recovery as a driver to cyclical stock performance: As the country continues to battle the pandemic, the article suggests there will be a “mini ‘W-shaped’ recovery,” adding that “a vaccine that works effectively will help drive economic recovery, and that would favor cyclical parts of the market.” The article cites the example of China, which has “had much more success in suppressing the virus, and its economy is benefiting.”
New political dynamics share a favorable fiscal and monetary backdrop: The election of Joe Biden, the article says, “brings with it a range of potential value-positive policy measures” including the ease of trade uncertainty, increased fiscal stimulus, a potentially weaker dollar and “more substantial reflationary policies.”
Shifting market dynamics put focus on valuations: “Value stocks have come under huge pressure as economic uncertainty has prompted investors to shorten their time horizons, pile into secular winders, and avoid cyclicals,” the article argues, noting that fear and uncertainty have fueled growth stocks “without regard to valuation.” But the article contends, “the idea that today’s biggest companies—primarily U.S. technology companies—will continue to dominate the next decade should be viewed with caution.” It also notes that value sectors “have the potential to benefit from an economic recovery and any revision to the overconcentration profile currently evident.”
The article concludes, “Although many of the trends driving growth outperformance may endure, we believe value stocks offer significant upside potential at this time” adding, “the quality and quantity of the opportunity set available to value investors right now is as compelling as it has ever been.”
