Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 460

Inflation: friend or foe of Value stocks in 2022?

Time flies in the world of investments, and the themes that were emerging last year have gathered speed, including high realised and anticipated inflation, a risk of a global recession and the outbreak of the Russia-Ukraine conflict. In this context, we have revisited the question of how Value stocks are performing, especially versus Growth. 

(Note. A Growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. A Value stock is a share trading at a lower price than the intrinsics of company's performance may otherwise indicate).

The story so far

Inflation commentary has moved from ‘transient’ to ‘temporary’ to ‘sticky’ and is now approaching ‘entrenched’ at a fast clip.

During this period of uncertainty, Value stocks have performed well, which coincides with (but is not entirely driven by) higher inflation. Very expensive Growth stocks, hit both by slowing growth and by inability to source materials, have sold off significantly.

We believe Value will continue to do well for some time (or Growth will do poorly), as the issues driving inflation are unlikely to be resolved any time soon, and the knock-on impacts will take some time to filter through.

How has Value performed?

While there is a fairly well-known, positive relationship between the returns to Value and inflation, the relationship is by no means simple. It was probably greater in the high-inflation period of the 1970s when oil prices were high and inflation was not targeted by central banks, as it is today.

However, two comments on this relationship:

1. Inflation is up, is sticky and is expected to stay high for some time

We know that higher inflation means higher nominal interest rates, and higher cost of debt for companies. Companies that rely on longer-dated cash flows for their valuation – so-called ‘long duration’ companies – are much more affected by increases in interest rates than those with shorter duration. These longer duration names are typically the expensive Growth stocks and are devalued and sold off more than shorter duration stocks, which are typically the cheaper Value-style companies. 

2. Economic growth expectations are muted

When projections of expected growth and future cashflows are positive, the market is willing to pay up for expensive stocks, betting that things will go well. However, if this growth is interrupted, as it has been recently, the expectations are less optimistic and expensive companies are sold off in favour of companies with more certain short-term opportunities, especially those that are cheaper. 

It's both an 'expensive' and 'risky' story

In combination, these two effects have played out as expected with Value significantly outperforming Growth over the last 6-9 months in most markets. The charts below show this.

The first chart shows that the performance of Value and Growth (measured here as the top and bottom quintiles of Book-to-Price) stopped diverging in the middle of 2021, and Value has had a resurgence. However, as the second chart shows, the story has also been about certainty. Low volatility (i.e. low risk) stocks have significantly beaten high-volatility/high-risk names since the middle of last year.

(Note. Book to Price is a valuation metric that compares a company’s current market value to its book value).

We have thus seen a two-fold rotation – away from expensive Growth to cheaper Value, and away from risky Growth to more stable Value.

Chart 1: Top and bottom quintile performance of 12-month volatility (MSCI ACWI ex AU)

Source: Realindex, Factset. Data as at 30 April 2022

Chart 2: Top and bottom quintile performance of Book-to-Price (MSCI ACWI ex AU)

Source: Realindex, Factset. Data as at 30 April 2022

The next two charts break down this difference in performance between the All-World (ACWI) and Australian universes since the start of 2022. In each case, the outperformance of Value over Growth has been stark.

Chart 3: Outperformance of Value over Growth MSCI ACWI ex AU

Source: Realindex, Factset. Data as at 30 April 2022

Chart 4: Outperformance of Value over Growth ASX 200

Source: Realindex, Factset. Data as at 30 April 2022

Do we expect it to continue?

Increases in realised or expected inflation tend to be correlated with a positive, relative return to Value, when compared to Growth.

Prior to COVID, an average inflation rate of around 2% was expected by the market over the following 10 years. With COVID, this fell sharply as economic contraction was likely. Since then it has rebounded, passed back through 2% and is now approaching 3%.

The standard measure for expected inflation is known as 'Bond Breakeven Inflation Rate” (BBIR), and in the most recent two months, the BBIR has spiked from 2.5% to near 3%.

The recent outperformance of Value has tracked some of this change in inflation expectations, more because of the sell-off in Growth than a strong bounce in Value (although this has happened too).

Chart 5: Breakeven Inflation and the Value-Growth Spread

Source: Realindex, Factset. Data as at 5 May 2022

We cannot, of course, draw a direct link between expected inflation and future performance of Value, although there is clearly a strong recent relationship.

While Value has done well recently, the cumulative outperformance of Growth over Value over the last decade is still much larger, and we can see that the trend in spreads of Valuation metrics has only corrected a little. This gives us some comfort that the Value resurgence still has a long way to run.

 

David Walsh is Head of Investments at Realindex Investments, a wholly owned investment management subsidiary of First Sentier Investors, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

For more articles and papers from First Sentier Investors, please click here.

 

RELATED ARTICLES

Will the drought break for value stocks continue?

Reece Birtles on selecting stocks for income in retirement

10 big investment themes to watch in 2022

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.