Brandes Investment Commentary: Is the Value Run Over? When ‘All Else Equal’ Is Rarely True

Before we dive into the topic of where we currently stand in the style leadership rotation, it might be helpful to start the discussion with where we stood two years ago. At that time, investors were understandably reluctant to allocate to value stocks given that value had underperformed growth in a meaningful way for a meaningful period (over a decade). Then came “Pfizer Monday” in November 2020, which became a catalyst for a value resurgence across most major markets. The outlook was positive, and in our thought piece, we highlighted some potential tailwinds for value-led environment, including:

  1. Economic recovery potential
  2. Inflation
  3. Valuation spreads compared to previous strong value cycles

Entering 2022, we were optimistic that these factors would continue to reinforce the value-led period going forward. However, the world has changed significantly in the past few months. Geopolitical concerns, triggered by the Russia/Ukraine conflict, have dimmed investor hope of economic growth while deepening worries about inflation. There are so many moving parts and ever-changing news flow, it is easy to get lost in the myriad of topical questions. Although it would be impossible to predict the outcomes of current world events and their impact on investment portfolios, we believe there are a number of factors that remain supportive of sustained value leadership.

Economic Recovery and Rising Interest Rates

Historically, the “ideal” conditions for value tend to involve solid economic growth and increasing interest rates. The global markets had experienced the exact opposite after the Great Financial Crisis: the most tepid economic growth since World War II, as well as low and declining interest rates. In the past couple of years, we started to see those factors reverse, which contributed to several bouts of value outperformance relative to growth (i.e., late 2020, late 2021, early 2022). Optimism about an economic recovery in an eventual post-COVID world appeared to improve investor sentiment. Additionally, the potential negative impact of rising interest rates on the present values of long-duration assets may have compelled investors to favor value stocks over growth (growth stocks have tended to be long-duration assets as their cash flows are usually projected to occur in further future than value stocks).

Impact of Inflation

Inflation has also historically been good for value. As the following chart highlights, value outperformance and inflation have been positively correlated.

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