It has been a tough time for value investors since the turn of the millennium. In many global markets, value has been the worst-performing factor, as quality, momentum, and growth traits have driven winning returns.
Seemingly undervalued stocks have become cheaper, while companies boasting good quality characteristics, rapid earnings growth, and strong share price momentum have been rewarded with increasingly stretched valuations. This is especially true in the US, where the rise of mega-cap stocks (especially those currently thriving under the collective moniker 'Magnificent 7’) have led the charge. The likes of Apple, Amazon and Tesla have seen their share prices rise over tenfold over the last decade.
But UK and European investors have struggled to find comparable opportunities, often seeking the proverbial needle in a haystack to replicate such gains.
However, as with all market cycles, periods of dominance eventually come to an end. Over the long term, value investing has still proven to be one of the most reliable strategies. Research by Two Centuries Investments highlighted the impressive performance of the value factor over nearly two hundred years, where even the largest drawdowns proved to be temporary setbacks in a broader, significant, upward trend.
In an excellent 1998 study titled “Value versus Growth: The International Evidence,” Eugene Fama and Kenneth French (Fama & French) demonstrated that, between 1975 and 1995, value stocks outperformed growth stocks in 12 out of 13 major international markets. On average, low book-to-market portfolios delivered an annual return 7.68% higher than their high book-to-market counterparts.
Despite this historical outperformance, value stocks have struggled since the global financial crisis, with growth taking the lead. There have been rumours that the so-called value premium may have run its course, but history suggests that value could be poised for a comeback.
This article, which explores some of the themes in the value investing world today, will be the first in a series focused on value investing. This series will examine some of the financial ratios and metrics that can be used to assist investors in discovering value opportunities across the European markets. By traditional measures, these markets seem to offer the most fertile hunting grounds for those bargain seekers.
Europe’s Value Tilt
Stock markets across Europe, with their heavier weighting toward value stocks compared to…
