Equity
General Investing

Global Equities: Is Value’s Outperformance Peaking?

By Ted Harlan, CFA,Bernard Chua, CFA
JUN 24 | 2022
Man at computer.

Key Takeaways

Growth underperformance appears overextended amid expectations that economic growth will slow and inflation risk will moderate.

The extreme shift in momentum favoring value and dividend yield factors has left investors underappreciating earnings growth and paying too much for defensiveness.

Investors may want to consider proven approaches and long-term strategies because we expect continued volatility.

Macroeconomic Headwinds Trouble Global Markets

Investor sentiment remains gloomy. Ongoing supply chain disruptions, new lockdowns in China, and war-related food and fuel shortages are weighing on businesses and investors. These issues have aggravated worries that persistently higher inflation and the Fed’s effort to contain it will trigger a recession or even stagflation.

The U.S. 10-year Treasury yield almost doubled from 1.6% at the end of 2021 to around 3% by May 2022. Equity markets have sold off alongside rates and credit. The MSCI All Country World Index, a measure of global equity performance, was down 12.8% year-to-date as of May 31, 2022. (Source for all data: FactSet.)

So far this year, only a handful of industries have delivered positive results — chiefly energy, mining and tobacco producers. They are heavily represented in value indices, which helps explain value’s recent outperformance.

Conversely, companies with growth profiles have been the hardest hit. Traditional growth sectors, including consumer discretionary, media and information technology, have led the underperformers.

Correlation of Momentum and Value Factors Are at 20-Year Highs

While the rotation into the more defensive categories may continue, we see indications the shift away from growth may be peaking. Figure 1 shows how the correlation of value and dividend yield factors to momentum is at levels not seen since the technology crash in 2001. Meanwhile, the correlation of growth factors to momentum has headed in the opposite direction.

Figure 1 | Correlation of Value and Momentum Factors Are at Multi-Decade Highs

Line chart showing the correlation of momentum and value factors since 2000. The correlation has risen sharply since 2020 and is substantially above average.

Data from 2/29/2000 - 4/29/2022. Source: MSCI, American Century Investments. Based on factor analysis of the MSCI ACWI Index.

Select Defensive Stocks Are Priced Like Fast Growers

The strong outperformance of perceived defensive businesses in the food and household goods categories has resulted in a rerating of those stocks. In some instances, low structural growers are trading at multiples comparable to faster-growing companies. See Figure 2.

Figure 2 | Some Unloved Growth Stocks Are Trading at Similar Multiples With Slow Structural Drivers

Price-to-earnings (P/E) ratios and five-year earnings-per-share (EPS) estimates of select high-growth and structural growth stocks. Though the EPS estimates for the structural growth stocks are lower, their valuations are comparable to high-growth stocks.

Data as of 5/12/2022. Source: FactSet.

A Review of Economic Data Suggests Inflationary Pressure May Be Peaking

Higher inflation and rising interest rates tend to be less of a headwind for value stocks. We expect economic growth to slow and inflationary pressures to stabilize. We think this will put a premium on companies that can sustain their earnings growth in this environment and create a more favorable backdrop for growth stocks.

Still, the timing of when inflationary pressures might ease remains highly uncertain. The prices of copper and other commodities have already fallen from recent peaks, but pricing remains elevated in areas like travel (e.g., airlines, car rentals) and the labor market.

We note these early indications that inflationary pressures are starting to wane.

  • Monthly U.S. CPI less food and energy may be reaching peak levels.{sup}1{/sup}

  • Ten-year breakeven rates have turned lower after rising through the majority of the first quarter.{sup}2{/sup}

  • The four-week average for unemployment claims recently ticked up, though the availability of workers remains tight.{sup}3{/sup}

Housing Market May Be Poised to Cool

Housing is the largest component of the Personal Consumption Expenditures Price Index and Consumer Price Index. It’s also been one of the hottest segments of the U.S. economy due to attractive mortgage rates and tight inventory. However, we think there are indications these tailwinds may be starting to lessen.

For example, mortgage rates have begun to rise, and we’ve seen evidence that tight housing inventories may be loosening. In absolute terms, the number of available houses remains low compared to historical trends. However, Figure 3 shows that the growth of active listings on a year-over-year basis has turned up compared to nearly three years of decline. The rise in listings indicates the supply of houses is growing.

Figure 3 | Weekly Active Home Listings Increase

Line chart showing the year-over-year change in active home listings. The growth in listings has improved since 2021, indicating the supply of houses available for purchase is growing.

Data from 7/1/2017 - 5/7/2022. Source: Realtor.com.

Stick With Your Long-Term Plans

As higher rates begin to pressure demand and take inflation lower, we would expect growth’s underperformance to plateau. However, we caution that timing factor performance and forecasting inflation are extremely difficult. In periods of market volatility, it is important not to overreact and stick with long-term investment strategies.

For a more detailed discussion, including additional exhibits, please download the complete article.

Authors
Ted Harlan, CFA

Ted Harlan, CFA

Portfolio Manager

Bernard Chua, CFA
Bernard Chua, CFA

Vice President

Senior Client Portfolio Manager

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Source: FactSet, U.S. Department of Labor, U.S. Bureau of Economic Analysis.

Source: FactSet.

Source: FactSet.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

The information is not intended as a personalized recommendation or fiduciary advice and should not be relied upon for, investment, accounting, legal or tax advice.

No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.