After a decade of low inflation, anaemic wages growth and falling bond yields, the perceived wisdom of markets had been that value stocks will continue to underperform compared to growth stocks.  However, the latest data from research house Lonsec supports the view that value stocks are back in favour with investors and a value rotation is well underway.

As part of its most recent Australian equities sector review, Lonsec found that in the 12 months to 31 December 2021, 61% of value funds outperformed the S&P/ASX 300 TR Index, up from a mere 5% over the five years to the end of December 2021. This tilt towards value funds is most stark for the rolling year to 28 February 2022, which saw 91% of value funds outperform versus only 46% of Growth funds.

Lonsec Director of Research, Peter Green, said “We have seen a growing shift in the market over the past 12 months, but this has really picked up in the last three months with outperformance jumping from 61% to 91% of Value funds. While outperformance is unlikely to stay such a high level for a sustained period of time, market conditions do now favour value managers”.

The key drivers of this value rotation are the spectre of rising interest rates and a belief from investors that inflation is gaining momentum as the COVID economic recovery takes shape in an environment still impacted by supply chain disruption, tight labour markets and still loose monetary policy. Investors have increasingly been pricing in this eventuality, bidding down long earnings duration assets whose valuations are more interest rate sensitive and rotating into ‘value’ stocks like diversified miners and financials likely to benefit more from the macro environment.

Value vs Growth outperformance

Style Outperformance
1 year to 28-Feb-22
1 year to 31-Dec-21
5 years to 31-Dec-21
Value 91% 61% 5%%
Growth 46% 67% 81%

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Rob Hardy

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