Value Column von Hans Peter Schupp

20. JUNE 2023

Equity allocation: the best of both worlds

Value has been favored again for some time. In the last two years in particular, value stocks have performed well. Thanks to the central banks, one might say, as interest rates have seen a revival, which has tended to hurt growth stocks. Admittedly, this is based on a sharp rise in global inflation and a further weakening economy. But as I said, value is back on the agenda.

Value did well, but growth stocks are catching up again

This provokes another discussion coming up again: Now that stocks and indices have done so well, don’t we have to postpone value investments again? That is the one million dollar question and no one can answer it seriously. But it’s not a matter of taking a final decision. If you are indifferent, then why not doing both and mix value and growth in a balanced portfolio.

Growth stocks are also on the rise again, be it Netflix, Meta, Microsoft or most recently Nvidia. In recent months, all of these companies have experienced veritable fireworks of rising stock prices and have recovered sharply from the lows they reached in the summer and fall of last year. In fact, it’s been a U.S. tech rally in stages since late 2022. Conditions for growth stocks on the stock market have improved since then. Falling inflation rates and a much slower rise in key interest rates have reassured investors and have spurred their appetite again. The growth fantasy of artificial intelligence is an additional driver, which is getting investors excited again about the tech sector. Bank of America is already warning of a first „small AI bubble“. If it bursts, it could be painful.

Beware of the „Most Crowded Trade

The „most crowded trade“ is also something to watch out for. This is the market segment in which the biggest crowd of investors are currently engaged. If at some point everyone pushes for the exit at the same time, things can get nasty. According to a recent Bank of America survey of international portfolio managers, the „most crowded trade“ for 55 percent of respondents is currently „big tech.“ Just a month ago, this number was only at 30 percent. Accordingly, one should be cautious.

It’s all in the mix

Let’s get back to value. In the MSCI World Index, the value segment has massively underperformed over the last 15 years. And you can’t make up for all that in only two years. Growth, on the other hand, has underperformed in the last two years. However, it has not lost everything that was built up before. But Apple and the likes of them still dominate the MSCI World index while value is underrepresented here.

Value funds have outperformed the indices

So much for the world. And in Europe? In Europe a value outperformance has not even begun yet. Hence, there is still a correspondingly large catch-up potential here, even if it occurs with a certain time lag. The remarkable thing is: In the last two years, value funds like our Contrarian Value Euroland fund have outperformed, but the value indices have not.

Value stocks are still favorably valued

The big winners recently have been stocks in the financial industry and oil companies, while utilities and real estate companies have weighed on the value indices. By the way, we are not invested in either those tow sectors in the fund. But in general, we can say that value stocks are still cheaply valued compared to growth stocks. Value has caught up a little bit, but it’s just starting to level out for the moment. And there is one more thing that speaks in favor of value stocks: while interest rates will perhaps be raised just a little bit more, they will definitely remain on a high interest rate plateau. Inflation has slightly come off, but most economists believe it will remain far from the two percent target. This will continue to weigh on the valuation of growth stocks. There may yet be some nasty surprises in store for some of them.

Conclusion: As an investor, you should simply reallocate a bit at the moment. Growth is good, but so is value – and absolutely essential in a balanced portfolio. After all, you don’t just stand on one leg in life!

Translation for convenience only!

The author: Hans Peter Schupp is a board member of FIDECUM AG and portfolio manager of the Contrarian Value Euroland fund.