Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 217

The potential for a value revival

The Danish philosopher Søren Kierkegaard observed that, “Life can only be understood backward, but it must be lived forward.” With the benefit of hindsight, events of the past often seem rational, even inevitable, yet the present is always fraught with uncertainty. This could also be said about investing.

Today’s investment climate could be summed up as cautious and noticeably bereft of conviction. While global equity markets have more than doubled from GFC lows, investors remain concerned about central bank policies, currencies and commodities, among other issues.

Even so, our company’s conviction in value investing is strengthening as we try to “understand the market backwards”.

What is value investing?

Value investing is a strategy where stocks are selected that trade for less than their intrinsic values. Value investors seek out stocks they believe the market has undervalued. These differ from growth stocks, which are companies whose earnings are expected to grow at an above-average rate relative to the market.

Value investors believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated.

Valuation gap is extreme

Value stocks remain historically cheap relative to growth stocks. In fact, the valuation gap between value and growth stocks on a Price to Book value (P/BV) is at an extreme not seen for some time (see chart below).

Investors would have to go back to the height of the ‘dotcom bubble’ in 2000 to find such extremes. Back then, interest in tech stocks was enormous, based on their perceived growth potential. Today, it is the consumer staples sector that is attracting market focus as investors look for growth stocks that offer the perception of safety and stability in an uncertain environment.

Value on the rebound

One of the stronger catalysts for a value revival is rising interest rates. In the past, value cycles have occurred when rising interest rates have corresponded with a strengthening economy, although some argue it is the stronger economy and inflationary pressures that were the real drivers of the value revival. Today, however, global economic growth is moderate and deflationary pressures persist.

While value can be pro-cyclically correlated to the economy, this isn’t always the case. For example, investors waiting for an improving economic cycle would have missed the value upturn in 2000. Investors fleeing value in anticipation of economic weakness would have missed value’s outperformance during the recession of 1981-82. In each of these instances, we believe stocks simply became too cheap and a reversion to the mean prompted a value rally.

Rather than economic growth, we consider valuation of stocks a far more accurate predictor of future returns and a value recovery. When it comes to value, today’s valuation starting point is distinctly compelling.

Value moving beyond 'the usual suspects'

Since the GFC, value stocks have been primarily concentrated in either the resource sectors such as energy and materials or rate-sensitive sectors such as financials. For many, being a value investor has therefore meant taking on commodity risk or interest rate risk.

Recently, however, value has proliferated beyond just a few deep cyclical sectors to across the broad market. For example, value is just as cheap today within pharmaceuticals and biotechs as it is within financials and energy, as shown in the chart below.

The long-term trends for pharma and biotechs are encouraging given the ageing world population and increased wealth in emerging markets. Regulatory reform and drug pricing are clouds hanging over the industry but will not impact all companies in the same way. The best way to deal with a tough price environment is to innovate. We are invested in companies working on drugs for immune-oncology, gene therapy and Alzheimer’s which have huge potential. Current concern and uncertainty is allowing us to buy new stocks at what we believe to be a discount, and this is where the advantage of having a long-term horizon and patience comes in.

Long term view helps pick a bargain

Uncertainty is a fact of life and the road ahead is rarely obvious. One way to deal with uncertainty is taking a longer-term investment horizon. Many of the macro and political variables that drive markets in the short term are unforecastable with any reliable degree of certainty. However, long term valuations move reliably through cycles, as do economic variables like commodity prices and interest rates. Quantifying the potential impact of different scenarios on each of our holdings’ prospects and earnings and contrasting them with the company’s valuation allows us to judge whether we have identified a value bargain.

 

Peter Wilmshurst is Portfolio Manager of Templeton Global Growth Fund Ltd (ASX:TGG) plus a number of Templeton Global Equity Group's global portfolios. This article is general information and does not consider the needs of any individual.


 

Leave a Comment:

RELATED ARTICLES

Reece Birtles on selecting stocks for income in retirement

Inflation: friend or foe of Value stocks in 2022?

The growth outperformance myth

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

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.