Market evidence has mounted for a return to value-based investing, with various indicators showing global and domestic economies have reached an inflection point where so-called ‘expensive defensive’ and growth stocks may continue to weaken.
This is the view of leading equities manager Perennial Value (Perennial). John Murray, Perennial Value managing director said value investment has been out of favour in recent years in the face of strong investment headwinds, and despite a strong relative performance over the longer term.
“However, while some argue it is always a good time to invest in value companies, we see ample evidence of an inflection point now in terms of value swinging back in favour over the next couple of years,” Mr Murray said.
“Defensive and growth stocks are currently looking expensive, and are also what we would describe as a ‘crowded trade’ – so for example there has been recent downturn in the share prices of growth stocks like Transurban and CSL,” he said.
Mr Murray reiterated that value investing for Perennial has two primary principles.
“The first is buying good businesses that are cheap. Secondly it is about the courage of your convictions. And yes, value investing has gone through a recent period of underperformance against some macro headwinds, so holding your convictions during short-term cyclical events is very important”.
Such headwinds have included record low global interest rates, lower growth and earnings over recent years – driving investors into defensive stock positions. Mr Murray said such stocks appear to have now become ‘expensive defensives’.
“Australia has among the most expensive defensive stock ‘darlings’ in the world, with potentially a lot more downside in those stocks to come,” he said.
“It’s interesting that the recent August reporting season in Australia saw defensive stocks underperform. Add in the fact that investors may simply exit these largely expensive defensive stocks and we believe the swing back to value is very much on the cards,” Mr Murray concluded.
