A comeback for value, or a dead cat bounce?

Value stocks have made a strong recovery over the past week. Is this a real resurgence or a temporary snap-back? Investment Officer spoke to Kris Hermie, CFA, senior portfolio manager at Boutique Asset Manager Value Square in Ghent.

Hermie: “Last week, we did indeed see a snap-back of value, compared to a highly oversold situation in August. When we look at our factor screens, in August, you saw “US long value” lose as much as 10 percent (top 15 percent large cap value with 2 percent weight cap), compared to momentum that ended positively. A remarkable difference that once again highlighted the link with falling interest rates. In that month of August, we saw that the interest rate on 10-year U.S. Treasuries fell from 2 to 1.5 percent. '

Trend following

Hermie isn't talking about a sustainable recovery in value versus growth/momentum yet: “These movements, both upward and downward, are being accelerated by trend followers (ETFs), automated investors and hedge funds, and by an exaggerated response to the bond markets. You can't always clearly determine why this is happening exactly. Since the end of August, the gap between value and momentum has been 14 percent in favor of value. In the same period, the German 10-year-old Bund also went from -0.71 to -0.55 percent. '

Still too early

As mentioned, a sustainable rebound needs a little more for Kris Hermie. “We also see it on the watchlist of companies that we monitor. Numerous companies have hardly moved in a very strong market since the beginning of the year and in one day they rise by 5 to 10 percent for no apparent reason.

Since the beginning of the year, you must also put value performance in a broader perspective. For example, the MSCI Europa Value Ytd performs +7 percent, but the MSCI Europe Growth stands at +24 percent. So there is no euphoria for Value yet, but it is already a positive signal of what happened in the past 10 days. Value has been underperforming growth since 2007, and such long periods should ultimately lead to a reversal to the mean. For the previous prolonged period of value underperformance, we have to go back to the period 1926-1941 of the last century, when we were in a depression in the US. '

Stock picking

Finally, Kris Hermie emphasizes that Value Square does not make macroeconomic predictions. According to Hermie, stockpicking and consistently buying good companies that are low-valued with a sufficient margin of safety, the classic value approach, has not often done investors any harm 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