Value Is What You Get

As November draws to a close, equities have seen extraordinary gains so far this month.  

TheS&P 500 index is currently up 11% on the month, the FTSE All Share index is up +14% and the Euro stoxx 50 is up +19%. And as a global benchmark, the MSCI World stock market index is on the verge of its best month ever, currently up some +13%.

Uncertainty has abated dramatically this month, following the US election.  This has also been due, to the happen stance of positive vaccine headlines following the elections.  However, the remarkable headline statistics have hidden a more subtle, yet important, performance differential “under the hood”.

On the one hand the darlings of the stock market – for example Facebook, AmazonApple and Microsoft, have gained “only” 5 to 6% this month, whereas on the other hand, the MSCI World Value index has jumped +16% on the month.

Value Outperforming Growth

In one of the best months for global equities on record so far, the curious situation has arisen of Value strongly outperforming Growth.  Conventional wisdom might rather say Growth should outperform Value in a raging bull market.  It’s interesting to understand why Value stocks could continue to outperform as the global economy stabilises.

An obvious first question is what are “Value” stocks?  

While Warren Buffet coined the well-known phrase: “Price is what you pay, but Value is what you get”, this only partly explains what Value stocks are.

Value stocks are simply those which are abnormally cheap against metrics such as expected earnings, cashflow or dividends.  Alternatively, they can be those that trade at a discount to “book-value” (i.e. the value of their assets), without a specific reason for the under-valuation.

One reason why Value stocks are currently particularly attractive globally, is that when carefully filtered and selected, a dividend yield of more than 4% on a forward-looking basis can be achieved.  The income from Value stocks can even exceed that on corporate bonds in the current low yield environment.  Furthermore, screens for Value do not have to sacrifice ESG credentials.  Value stocks that avoid a heavy carbon footprint, for example, still offer outstanding yields.

This suggests Value investing should provide an attractive foundation for long-term pension money, in a yield hungry world.   Value stocks may well have their day in the sun once again as the global economy stabilises.