Why has the Value Style Struggled?

Australia Value Equity strategy

24 July 2018

Why has the Value Style Struggled?
Key points
  • Value style has struggled relative to momentum despite strong earnings per share (EPS) growth.
  • Is now the time for value to recover? Now may be the time to look for value opportunities.

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We have witnessed strong world earnings-per-share (EPS) growth since June 2016, extending the postglobal financial crisis (GFC) run to nearly 10 years of expansion.

Given the persistence of the economic cycle, momentum strategy performance has been exceptionally strong.

MSCI World EPS and momentum

Past performance is not a guide to future returns.
Source: Martin Currie Australia, FactSet; as at 30 June 2018. *Rebased to long term average P/E for the market (17x). **Cumulative returns in US$.

The strength of momentum has also driven unprecedented underperformance of value-based strategies globally for the last few years.

MSCI Value vs. MSCI World: Rolling 10-year annualised return differential

Past performance is not a guide to future returns.
Source: Martin Currie Australia, Factset; as at 30 June 2018. Returns in US$

EPS Growth is not the problem

We had originally surmised that the main reason traditional value indices had performed poorly was that Value stocks have not shown great earnings growth compared with Growth or FANG (Facebook, Amazon, Netflix and Google's parent Alphabet) stocks.

However, we were surprised to find that in the global market, since June 2016, earnings growth of Value (+14.8% p.a.) has in fact been stronger than that of Growth (+12.5% p.a.).*

MSCI World EPS by style

Past performance is not a guide to future returns.
Source: Martin Currie Australia, Factset; as at 30 June 2018.

Is now the time for value to recover?

In our research, we have found the recent strong returns of Growth strategies appear to have come not from earnings growth, but from a price-to-earnings (P/E) re-rating (18.7x to 20x) versus a de-rating of Value (from 14.3x to 13.1x).*

MSCI World P/E by style

Past performance is not a guide to future returns.
Source: Martin Currie Australia, Factset; as at 30 June 2018.

So, it looks like value stocks have been beaten up, despite their better EPS growth. Now may be the time to look for value opportunities.

* Source: Martin Currie Australia, FactSet; as at 30 June 2018.