How Has the Value Rotation Impacted Investing?
Value investing is back. After a long-awaited period, value rotation has played out over the past several months, what does this mean for investors?
What is value investing?
Value investing is a type of investment strategy that aims for stocks that are trading for less than their intrinsic value. This type of strategy aims to seek out stocks that may have been underestimated by the market, meaning investors can buy the stocks at a lower price for them to provide better returns in the long run.
What is the value rotation?
After the economic shockwave of COVID-19, value investing is rising in popularity. The rotation means that investors have been moving away from growth stocks since last November towards value stocks which are more cyclicals and benefit from the upswing in the business cycle following the gradual re-opening of the economy post pandemic.
The gap in performance between growth stocks and value stocks has been a feature of financial markets for the last ten years, however this trend might become far less pronounced or even invert going forward, with value stocks playing a larger role in terms of performance.
How has the value rotation changed the market?
This month, Trustnet released an article detailing how the rotation has impacted various regions, industries and asset classes over the past few months.
According to Trustnet, the biggest beneficiaries from the value rotation have been UK equities, energy stocks, financials and small-caps.
Some of the most significant data from the rotation has been to do with “vaccine Monday”, when the efficacy results were announced for the Pfizer-BioNTech jab in November 2020, which “led to a long-awaited rotation out of growth in favour of value”.
According to Trustnet, “regions such as the UK tend to have more value-heavy industries dominating their equity index weightings and have performed better during the rotation.”
However, a growth-heavy market index such as the S&P 500 “hasn’t performed as well”, and according to Trustnet, “not all asset classes have benefited from the value rally equally”.
Small-cap value stocks outperformed by a wide margin, with large-cap value stocks outperforming even small-cap growth stocks. This, according to Trustnet, “suggests that the value bias outweighed the impact of the smaller companies effect, which predicts that small-cap companies tend to outperform their larger counterparts”.
Several different industries have also seen a shift in performance during the last several months since Vaccine Monday, including energy and financials, as well as materials, industrials and real estate.
According to Trustnet, “Much of the performance of the energy industry and materials industry may be attributable to the dramatic rise in the prices of commodities which began to accelerate after Vaccine Monday”.
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