Are value indexes waking up from their 15-year slumber?

Analysis confirms pumped-up investor interest in value strategies across almost every global region

Are value indexes waking up from their 15-year slumber?

After 15 years, the lost era of value investing may finally be coming to an end as economic indicators, inflation expectations, and rising interest rates coincide with a repositioning of investors’ portfolios.

In a recent blog post, Waman Virgaonkar and Hitendra D. Varsani of MSCI Research noted that interest in value strategies – as expressed through stock, sector, country, or regional selection – was reignited by the rollout of COVID-19 vaccinations late last year.

“In Q4 we saw value outperform in almost every region around the world, and the trend has continued into this year as well,” they said, highlighting the MSCI World Enhanced Value Index’s year-to-date outperformance of 9.11% relative to its parent index. Financials and energy, traditional value sectors, have also come out as the best-performing sectors so far in 2021 off the back of rising rates and oil prices.

The two also highlighted previous research where they found that higher inflation and higher rates have historically been associated with outperformance of the value factor. U.S. inflation expectations have been on the rise since March last year, they noted, and a trend of increasing 10-year U.S. Treasury yields that began in August 2020 has accelerated in the last few weeks.

From the start of the vaccination rollout on Dec. 7, 2020 through to March 29, 2021, they found that the MSCI World Enhanced Value and MSCI World Small Cap indexes bested their parent MSCI World Index by 7.53% and 5.5%, respectively, suggesting that investors expect the global economic recovery to gather momentum.

“The recovery and early expansion phases in the macroeconomic cycle have historically favoured value stocks, and their performance over the last three to six months may catch investors’ eyes,” Virgaonkar and Varsani said.

Based on Lipper data, they found that cumulative cash flow into value ETFs over the past year has topped US$30 billion, while cash flow for growth ETFs was flat overall.

Within the U.S. market, they determined that the utilities, telecom services, consumer staples, and energy sectors had lower valuations than industrials and consumer discretionary companies. From a country perspective, the U.K. Switzerland, Austria, Belgium, and Italy had lower valuations relative to Japan, France, Hong Kong, the U.S., and the Netherlands.

“While the macroeconomic environment, and relative valuation of the value factor itself, is like no other seen in the last 20 years, it remains to be seen whether this is a short-term bound or a longer-term structural shift in factor leadership,” they said.


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