Value has been unloved for almost a decade. Even with a tentative rotation since the start of the year, there could still be further to go, says Scott Malatesta, Managing Director of Product Strategy for the BlackRock Sustainable American Income Trust plc.
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One of the defining characteristics of financial markets in 2022, aside from a lot of volatility, has been the rotation from high growth areas such as technology, to previously unloved ‘value’ areas of the market.1 This reappraisal is welcome, after the elastic had been stretched too far in favour of growth companies. The question is whether it can endure from here.
This rotation has a number of drivers. The first is the change in direction for inflation and monetary policy.2 At a time of higher inflation, cash today is more valuable than cash tomorrow, which means dividends have more appeal. This has tended to favour dependable, cash generative businesses that pay a regular dividend over areas such as technology.
Interest rates have risen significantly since the start of 2022 and look set to keep rising for the remainder of the year.3 US interest rates are expected to reach 2.9% by the end of the year4 their current rate of 0.75% to 1%. It is a similar picture across most major markets. Looking historically, value has tended to do best in periods of higher and rising rates and higher and rising inflation5, so this is likely to be a support for the value approach in the near term.
Another factor has been earnings. It was clear that investors had extrapolated the pace of growth seen during the pandemic in areas such as online communication or ecommerce some way into the future. Subsequent performance has disappointed. Netflix has lost subscribers6, for example, while Amazon has also seen lower growth than expected.7
In contrast, earnings for the ‘value’ areas of the market have been far stronger. This is particularly true for areas such as energy and materials, which have had a tailwind from higher commodity prices, but is not confined to those areas. In general, the momentum is with the earnings of value areas, while investors are having to revise the lofty expectations for many growth companies.8
This difference in earnings has helped sustain the gap in valuations between value and growth companies. Value companies always trade on a discount to growth companies, but that elastic has become increasingly stretched in recent years. Even after the recent rotation, that gap still looks wide by historic standards because earnings for value stocks have been strong.9
Outlook for value
Investors may have looked at the brief rotation in markets and wondered whether they have missed the boat on rotating into value. The ‘future-proof’ nature of technology has some ongoing appeal. However, it is worth noting that having a value screen for a portfolio does not limit investors to dull metal-bashing companies. The BlackRock Sustainable American Income Trust has around 15% of its portfolio in technology companies, including Cisco Systems and Cognizant.
Technology is not the only sector offering growth. We also find plenty of growth in areas such as healthcare. Astra Zeneca, our largest holding, has structural growth in its oncology business. A notable new launch has been breast cancer drug Enhertu.10 The energy transition is also a fertile source of growth for companies. In the portfolio, we hold Sempra, a North American energy infrastructure company based in San Diego, which has helped build the infrastructure for the energy transition.
Reference to Specific Stocks. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
We believe ‘value’ is still unappreciated by the market. Not only do valuations look appealing relative to history; these sectors may offer stronger earnings momentum.
The past few years and the strong performance of conventional growth sectors have left many investors with portfolios that are poorly balanced. As such, there is still plenty of rebalancing to be done. This is particularly true for ESG portfolios: the vast majority of sustainable ESG funds are growth oriented.11
We believe ‘value’ is still unappreciated by the market. Not only do valuations look appealing relative to history; these sectors may offer stronger earnings momentum. While the market has moved a little way, value has seen over a decade of underperformance relative to growth.12 We're now in a different environment and there's a lot of stored value in those value stocks.
This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of July 2022 and may change as subsequent conditions vary
For more information on this Trust and how to access the potential opportunities presented by North American markets, please visit www.blackrock.com/uk/brsa
1https://www.ft.com/content/b7ee2c90-3aa1-4087-b221-4ef7682c5110 - May 2022 Financial Times – Value stocks shield investors from worst of 2022 market storm, May 2022
7https://www.nytimes.com/2022/04/28/technology/amazon-earnings.html
8hhttps://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_070122.pdf – pages 2 and 6
11https://www.bloomberg.com/news/articles/2022-07-20/blackrock-tilts-the-esg-tables-toward-value-stocks-green-insight#xj4y7vzkg - July 2022
