Is the lack of Value the biggest risk to your portfolio? - Page 1



Is the lack of Value the biggest
risk to your portfolio?
European Income Team
The decline in Value and rise in extreme valuations
It is no secret that Value investing has had a torrid time lately. In fact,
not just lately - the chart below shows the relative performance of
Value versus Growth styles in Europe since 2007. Save for a few
sharp rallies, it has been one way traffic. The second half of last year,
which many Growth funds found so painful when Value finally found
a bid, now barely registers at all.
MSCI Europe ex UK: Value vs Growth
What is the driver of this chronic underperformance? As ever, there
are many causes, but the main culprit is simply the direction of bond
yields. As bond yields have plummeted to ever lower levels, so
has the relative performance of Value versus Growth. In fact, the
correlation is 93%.
Correlation between bond yields and Value vs Growth performance
110
105%
MSCI Europe ex-UK Value v Growth
German 10y government bond yield (RHS)
4%
100%
100
95%
3%
90%
90
85%
80%
80
75%
70%
60%
55%
‘09
‘11
‘13
‘15
‘17
‘19
2%
1%
70
0%
60
-1%
65%
‘07
5%
‘05 ‘06 ‘07 ‘08 ‘09 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19
Source: Liontrust, Bloomberg.
Source: Liontrust, Bloomberg.
Where has this left valuations? The less glamorous areas of Value
usually do trade at a discount, but as the chart below shows, the
price/earnings (PE) discount is wider than at any point in more than a
decade. In fact, Citi reports that on a price/book basis, Value is now
trading near the 2000 lows, the zenith of the global tech bubble.
A false dawn for Value
A week is a long time in politics (and each week in UK politics seems
at least a year long), but the same is also true in equity markets. In June
2018, the US Federal Reserve initiated its second rate rise of the year,
and the markets began to realise the Fed was serious about hiking
rates. From 2.75% in late May, the US 10 year government bond
yield peaked at 3.25% by October, the highest level since 2007.
Europe ex UK Value vs Growth - PE Discount
15%
It looked as if a resurgent US economy, powered by Trumpian tax cuts
and with unemployment at its lowest levels since 1970, was going to
drive global rates higher. It seemed as if the decades-long super-cycle
of ever-lower yields (starting from a peak of 15.8% in 1981 for US 10
year bonds and finishing below 1.5%) was finally over.
20%
25%
30%
35%
40%
50%
‘06
‘08
Source: Liontrust, Bloomberg.
‘10
‘12
‘14
‘16
‘18
The world had reckoned without two things, however. The first
was President Trump’s tariff war, which began to slow global trade
noticeably. The second was President Trump’s Twitter war – in this
case directed against the Federal Reserve’s policy of raising rates. It is
probably fair to say that President Trump’s view of debt, and its uses,
is quite different to that of most US presidents. Forbes has reported
that in the early 1990s, Donald Trump personally owed almost a
billion dollars. This seems likely to induce a decided preference for
low interest rates.

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