A comeback for value, or a dead cat bounce?

Value stocks have made a strong recovery over the past week. Is this a true recovery or a temporary snap-back? Investment Officer spoke with Kris Hermie, CFA, senior portfolio manager at boutique asset manager Value Square in Ghent.

Hermie: "Over the past week we have indeed seen a snap-back of value, relative to a strongly oversold situation in August. Looking at our factor screens, US long value in August saw a loss of no less than 10 percent (top 15 percent large cap value with 2 percent weight cap), compared to momentum which clocked in positively. A remarkable difference which highlighted the link with falling interest rates. In that month of August, we saw interest rates on 10-year U.S. Treasuries fall from 2 percent to 1.5 percent.'

Trend following

Hermie is not yet talking about a sustainable recovery of value versus growth/momentum: 'These movements, both upward and downward, are accelerated by trend followers (ETFs) , automated investors and hedge funds, and by an overreaction in bond markets. One cannot always clearly identify exactly why this is happening. Since late August, the gap between value and momentum has been 14 percent in favor of value. During the same period, the German 10-year Bund also went from -0.71 to -0.55 percent.'

Still too early

For Kris Hermie, a sustainable rebound needs a little more, as mentioned above. 'We also see it on the watch list of companies we follow. Numerous companies hardly move since the beginning of the year in a very strong market and then in one day they rise 5 to 10 percent for no apparent reason.

Since the year began, you also have to put value performance in a broader perspective. For example, the MSCI Europe Value Ytd is performing +7 percent, but the MSCI Europe Growth is up +24 percent. So there is no euphoria for Value yet, but at least what happened over the past 10 days is a positive sign. Value has now been underperforming growth since 2007, and long periods like this should eventually lead to a reversal to the mean. For the previous prolonged period of underperformance of Value, we already have to go back to the period 1926-1941 of the last century, when we were in a depression in the US.'

Stockpicking

Finally, Kris Hermie emphasizes that Value Square does not make macroeconomic forecasts. According to Hermie, stockpicking and consistently buying good companies that are low valued with a sufficient margin of safety, i.e. the classic value approach, has not often benefited investors in the long term.

Source

Investment Officer

URL: https://www.investmentofficer.be/nl/nieuws/een-comeback-voor-value-een-dead-cat-bounce

Author: Jurgen Vluijmans