Will 2020 be the year for value stocks?
The valuation premium for quality and growth has hit new decade highs, driving the ASX200 average forward PE to sit ~14% above the 20-year average. But the average always hides the detail: industrial PEs are sitting 36% above the 20-year average, miners 18% below and banks 15% below.
The most recent correction in momentum stocks sees this factor at a new YTD low. However, the valuation dispersion looks little changed with the bubble in the defensive and quality/growth names still at extreme levels, as shown in the following charts.
Chart 1: High PE firms trade an average forward PE of 36.7x, which is 45% above the 20-year average
Source: Goldman Sachs, as at November 2019
Chart 2: High-quality forms trading at levels above that seen during the 2000 tech bubble
Source: Goldman Sachs, as at November 2019
The door opens for a value bounce back
Interest rates at multi-decade lows are causing bubble-like valuations across growth and quality names that will eventually burst given the heady multiples being paid.
Donald Trump appears keen to sign a mini-deal with China to avoid further tariffs that may hurt US voters prior to the 2020 presidential election.
A no-deal Brexit tail risk has essentially become very unlikely and thus any further clarity on a sensible Brexit or a ‘remain’ will be viewed positively.
The global manufacturing downturn is now essentially halfway through a typical three-year cycle with the 2H traditionally a bottoming out and recovery. Therefore, potential for reflation in 2020 as global PMIs trough is a powerful driver of the market. In times like this, cyclicals and economically sensitive stocks do well, and we expect defensive, growth and low vol stocks should reverse some of the exorbitant valuation multiples they are priced on.
Geopolitics has been one of the largest drivers of the slump in global growth and corporate profits over the past year. Therefore, less stress can be a powerful catalyst for a cyclical revival. Compounding this is the cheap valuations and extreme positioning of the market that has the potential for violent rotations into the value end of the markets.
In summary
As a value manager, our conviction lies in a process that is based on long-term sustainable earnings and cash flows, priced on appropriate multiples.
So, when the market reverts to more normal conditions, a patient active value manager (and investor) can benefit enormously.
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This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.
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Brad joined the business in 2002. He has 28 years’ experience primarily in the funds management and stockbroking industry, and has overall responsibility for managing the Australian equities team, process and portfolios. Prior to joining, Brad was...
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