How long will the good times last for Value?
The resurgence of Value stocks since November 2020 hasn’t been one-way traffic, Growth having re-taken the lead a couple of times since then.
But this only serves to strengthen Lazard’s Aaron Binsted's belief that Value is set for longer-term outperformance. He suggests that strong volatility is often seen during pronounced market turning points, “when such a dominant narrative gets challenged.”
How long will this outperformance last? Aaron says it's not a question of time, it's a question of quantum and he expects Value to hit new relative highs before this story fully plays out.
With inflation remaining stubbornly high, and central banks beginning to tighten policy, attention has again turned to the Value vs Growth dichotomy. I recently took the opportunity to speak with Aaron to hear some of his current views on markets. And of course, share his view on some stocks that are poised to benefit.
Why we've passed the turning point
Aaron refers to three key observations over the last two-plus years:
- violent swings between styles and stocks,
- high inflation, and
- central banks saying they're going to change their expectations and bring forward rate hikes.
“All of those have increased our confidence that we’ve seen the turning point,” Aaron says.
He also highlights a common factor in the two instances last year when the “old bull market” of Growth pulled ahead again. On both occasions, between March and May and again in the fourth quarter, new COVID variants were identified in Delta and Omicron, respectively.
“Maybe there'll be another wave and we'll see a similar thing again. But I think we're all increasingly of the view that these things are less likely and would have less severe health and economic outcomes,” Aaron says.
How long will Value outperform?
Aaron balks at this question, preferring to focus on the size of the swing rather than its longevity.
“Every time we've seen these bubbles in Growth multiples, they have corrected, and Value has made new relative highs after. Sometimes it has been rapid and violent, other times it's leaked out over longer time periods,” Aaron says.
“I can see scenarios playing out either way in terms of the timing, but either way, it’s relatively easy to size the quantum of the performance.”
As alluded to earlier, rising inflation and interest rates have played a large part in the rotation. Though he emphasises the de-rating of Growth stocks would have happened anyway, “but the changing in rates has turbocharged it.”
He suggests that even if inflation started unwinding tomorrow and the Fed instead decided on only one or two rate rises in 2022, the ascendance of Value over Growth would continue.
Energy, insurance among top picks in Aussie stocks
Aaron's Australian equities team regards energy and non-bank financials as strongly placed over the next three to five years.
He notes that, for a long time, additional investment in global energy supply has been slowing faster than demand. “I think we’re going to have an extended period of what we would consider ‘above equilibrium’ pricing, which is just going to boost cash flows, margins, and dividends.
His top energy pick is Woodside Petroleum (ASX: WPL), which appeals because of its high-returning oil projects, particularly some of those added recently as part of the $40 billion deal with BHP. Aaron is also attracted to the long-term LNG projects that form the bulk of Woodside’s business. “We know that gas demand is going to have structural growth in Asia for at least the next 20 years. So, it's a really nice combination of really high returning cash flow, short payback in oil and longer-term steady cash flow on the LNG side,” he says.
In financials, Aaron expects the insurance industry to be a key beneficiary of higher interest rates. He cites QBE Insurance Group (ASX: QBE) as a local beneficiary, estimating that for every 0.25% interest rate increase, the company's earnings per share lifts by between 5% and 6%.
Computershare (ASX: CPU), which provides corporate trust, stock transfer and employee share plan services, is another company that benefits from rising interest rates. With tens of billions of dollars held on account for clients, the interest earned accrues to the company. Aaron estimates Computershare’s earnings per share rises around 10% for every 0.25% interest rate increase.
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Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.
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