A Value Recovery Is Long Overdue

It’s been a long, hard slog for value stocks lately. I’d say we’re long overdue for a value recovery. But what would it take?  

Whether you look at one- , three- or five-year results, the cheapest global stocks have logged some of their worst relative performances in 40 years. This losing streak is also the longest on record, far surpassing the average slump of a year and eight months and the previous record of two-and-half years.

Why has value failed so badly this time round? After all, value stocks have outperformed in the prior three recessions and other geopolitical upheavals. But this crisis has been much more severe and tenacious, and its effect on investor confidence has been much more corrosive.

When the range of possible economic outcomes is as wide and unpredictable as it’s been in recent years, investors lose faith in their ability to forecast too far out into the future. They shorten their investment horizons. They want stable earnings, reliable dividend income and immediate payoffs. What they don’t want is controversy or companies with questionable prospects, no matter how temporary their troubles may be or how depressed their stock prices.

This disregard for valuation is atypical. Value stocks have been hands-down winners over the long term, even including this postcrisis lapse. This history is also why I think a value comeback is close at hand.  We’ve been through value slumps before, most recently during the Internet craze. But, at some point, valuations relative to earnings power become too enticing to pass up. Investors plow back in, driving value recoveries that have typically lasted many years and more than made up for past losses.  

I think we’re at a similar tipping point today. The safe assets that are winning today look expensive and are unlikely to generate the future returns investors need. To get better returns, investors will need to take on more risk—and, in our view, value stocks offer an exceptional opportunity today.

As the first display below shows, if you exclude the tech bubble, the cheapest quintile of global stocks is selling at one of the biggest discounts relative to the most expensive stocks since the mid-1960s. The bigger the discount, the greater the value return potential. Spreads have never stayed this wide for long, and when they normalize, patient value investors are richly rewarded.  My colleague Vadim Zlotnikov measured the opportunity from a different perspective in a recent article.

The Value Opportunity Is Enormous

Valuation spreads are wider than usual across all sectors of the economy, as the second display shows. And, unlike times past, taking advantage of this opportunity doesn’t require buying badly damaged companies. The cheapest global stocks today are less leveraged and have higher free-cash-flow yields than usual. These factors create ideal stock-picking conditions. The Value Opportunity Is Spread Across Sectors

For value to regain its historical dominance, investors will first need to regain their trust in the future. That will likely take a sustained improvement in expectations for economic growth. We see reasons for hope. Central banks’ commitments to do whatever it takes to avert economic disaster have taken the liquidity-driven doomsday scenerios off the table and bolstered risk appetites. The stabilization in US housing and other durable-goods markets is another positive sign with far-reaching implications for global growth. We’ve seen how even modest relief from crisis headwinds can lift investor spirits. With the value opportunity this large, this diverse and of this high quality, we think investors should get some exposure.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Sharon Fay is Head of Equities at AllianceBernstein.

Sharon Fay

Sharon E. Fay was named Head and Chief Investment Officer of AB Equities in July 2010. She is responsible for overseeing the portfolio management and research activities relating to all equity investment portfolios. Previously, Fay served as CIO of Global Value Equities from 2003 to 2014. From 1999 to 2006, she was CIO of European and UK Value Equities, serving as co-CIO from 2003 to 2006 after being named CIO of Global Value Equities in 2003. From 1997 to 1999, Fay was CIO of Canadian Value Equities. Prior to that, she had been a senior portfolio manager of International Value Equities since 1995. Fay joined the firm in 1990 as a research analyst, subsequently launching Canadian Value, the firm’s first single-market service focused outside the US. She then went on to launch the company’s UK and European Equity services and build Bernstein’s London office, home of its first portfolio management and research team based outside the US. Fay holds a BA from Brown University and an MBA from Harvard Business School. She is a CFA charterholder. Location: New YorkSharon E. Fay was named Head and Chief Investment Officer of AB Equities in July 2010. She is responsible for overseeing the portfolio management and research activities relating to all equity investment portfolios. Previously, Fay served as CIO of Global Value Equities from 2003 to 2014. From 1999 to 2006, she was CIO of European and UK Value Equities, serving as co-CIO from 2003 to 2006 after being named CIO of Global Value Equities in 2003. From 1997 to 1999, Fay was CIO of Canadian Value Equities. Prior to that, she had been a senior portfolio manager of International Value Equities since 1995. Fay joined the firm in 1990 as a research analyst, subsequently launching Canadian Value, the firm’s first single-market service focused outside the US. She then went on to launch the company’s UK and European Equity services and build Bernstein’s London office, home of its first portfolio management and research team based outside the US. Fay holds a BA from Brown University and an MBA from Harvard Business School. She is a CFA charterholder. Location: New York

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