Despite closing the performance gap somewhat with growth stocks last year, value companies still remain relatively cheaper by a wide distance, according to South Africa-founded global equities firm, Orbis.
A recent Orbis analysis found the ‘valuation gap’ between growth and value peaked in 2020 at the highest level since the great depression years of the 1930s.
“But the gap today remains excessively wide – wider than even the peak of the dotcom bubble,” the report says.
“Whilst this dynamic started to reverse in 2022, value shares still have a long way to go before they normalise versus growth.”
Orbis also kicks back against commonly held assertions that value underperforms in recessions or can only outperform during periods of high or rising interest rates.
The study shows the recession record of value versus growth is reasonably even over multiple US economic downturns dating back to the 1920s: value outperformed growth in seven of the 16 US recessions included in the Orbis analysis “often meaningfully so”.
“Investors now face what might be the most anticipated recession in recent time but take this with a grain of salt; investors are also notoriously bad at forecasting recessions,” the paper says. “If, against the odds, the punters get this call right, they also need to anticipate the type of recession it will be, because that matters just as much when assessing value relative to growth.”
Similarly, the Orbis note says the correlation between high interest rates and outperforming value stocks is weak at best over the long term.
“And while the two have indeed been more correlated over the last decade, that connection has more recently weakened and the correlation is heading back toward its long-term average, which is close to zero,” the study says.
However, investors should review any allocations to value managers, Orbis says, for any evidence of ‘style drift’ following the relentless growth outperformance of the previous decade.
“With valuation gaps as wide as they are at present, value managers should be leaning into the opportunity not shying away from it,” the paper says.
Orbis was founded in 1989 by legendary South African investor, Allan Gray, as a value-oriented global equities shop. The manager boasts almost A$50 billion under management globally including a mandate with the Accident Compensation Corporation.