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Why value investing could return from the dead in 2021
Despite underperforming over the last decade, a fund manager has highlighted how the upturn for value stocks is expected to continue in 2021.
Why value investing could return from the dead in 2021
Despite underperforming over the last decade, a fund manager has highlighted how the upturn for value stocks is expected to continue in 2021.
The last 10 years have been tough for value stocks, having underperformed by roughly 50 per cent against growth over the last decade.
But according to Dougal Maple-Brown, head of Australian equities at Maple Brown-Abbott, value stocks turned a corner during the final quarter of 2020, and are likely to continue their growth into 2021.
Despite a few "tough conversations" with clients over the past decade, Mr Maple-Brown is confident value stocks, such as major banks and energy companies, will perform strong this year.
“There was a significant market shift in favour of value in the last quarter of 2020 with a number of growth stocks tracking sideways or underperforming, while value stocks outperformed,” he said.
“A couple of factors drove this, such as the news of a successful COVID-19 vaccine and its speedy rollout in many countries, as well as the US election result, both of which helped push long bond yields higher.”
Mr Maple-Brown highlighted that many of the stocks, value investors traditionally buy, are currently facing take-over bids, which he touted as a “lights on the horizon” moment for value investing.
“When other companies want to overtake your companies at cheap prices, when even private equity makes bids for [value] stocks, it’s a fair sign that other people apart from value managers are seeing value in these stocks,” Mr Maple-Brown said.
Mr Maple-Brown said that in a low interest rate environment, it is likely for company take-overs to continue for lower-valued stocks.
“The cost of money is very cheap, growth is pretty scarce and valuations on stocks are still cheap despite the rally, so it is likely to continue,” Mr Maple-Brown said.
He also pointed out that investors are potentially overpaying for major growth stocks, including Afterpay and PolyNovo, following a strong rally in 2020.
“Although the price-earnings ratios of the most expensive stocks in the Australian market have already started to come down from their absolute peaks, they remain extremely high, so there is still a lot of scope for these stocks to de-rate,” he said.
“Afterpay is by far the biggest company [in Australian tech] worth over $40 billion at the top of our market, somewhat scarily still yet to make a profit,” he said.
Mr Maple-Brown revealed that he is currently overweight on stocks in major banks and energy companies, which he expects to come out on top.
“We are currently overweight the banking sector for the first time in many years. The banks had a volatile time during 2020, but as COVID-19 situation improves, bad debt expenses are likely to be written back, so we could see earnings upgrades and even dividend upgrades. We’re also overweight energy sector as prices are still fairly depressed,” Mr Maple-Brown concluded.
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