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Coronavirus Rising Rates Equities White Paper

Value's New Hope

Will the Pandemic Exit Be the Catalyst?

22 March 2021
4 min read

WHAT YOU NEED TO KNOW

Market trends in early 2021 have raised hopes that a sustainable recovery for value stocks is under way. However, after a decade of underperformance, many investors are understandably skeptical. We believe the near-record discounts of value stocks represent pent-up performance that may signal outstanding recovery potential. Our research aims to determine what it would take for value stocks to stage a sustainable comeback, and to evaluate the potential payoff for investors willing to initiate, expand or rebalance allocations to value stocks today.

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53%
Near-record discount of MSCI World Value to MSCI World Growth, based on price/forward earnings at the end of 2020
US$202 Billion
Cumulative net outflows from value equity funds since 2010
45%
Estimated return potential for global value stocks in 2021–2022, in a projected moderate recovery scenario*
Author
| Chief Investment Officer—Global and International Value Equities

Investors in value stocks have always been contrarian thinkers. But never as much as today, amid growing challenges to the investing style after a decade of underperformance and a painful 2020. To be a dedicated value investor in 2021 requires swimming against a wave of popularity for growth stocks and defying performance headwinds of historic proportions.

Critics of value investing have plenty of ammunition. Perhaps market conditions in the 21st century have created a permanent advantage for growth companies. Maybe investors’ behavioral biases, which trigger opportunities in companies facing controversy, no longer drive mispricing anomalies in misunderstood stocks. Some traditional value metrics don’t seem to work anymore. And with interest rates still near historic lows, the hurdles to a value winning streak look especially high.

But writing off value investing today is a mistake, in our view. This is not simply because return patterns shifted in value’s favor during the fourth quarter of 2020, providing a glimpse of the rebound potential. Rather, we believe that a continuation of the powerful forces that have driven the value-growth divide in recent years is untenable. In fact, COVID-19 has produced the ultimate value controversy, severely punishing many companies that are struggling with uncertain long-term recovery prospects.

By the end of 2020, value stocks were left trading at a historic discount compared to growth stocks. Based on price/forward earnings, the MSCI World Value Index was 53% cheaper than the MSCI World Growth Index. Near-record discounts persist in value stocks across a wide range of industries and regions. As a result, we believe that an unprecedented value opportunity now prevails across sectors, industries and regions.

In our view, the dramatic effects of the pandemic may be a catalyst for change, as five key developments (Display) could foster an unwinding of the extreme divergence of value and growth stock valuations in the coming years.

How Might Value Win?
Recovery from the Pandemic—Moving Towards Normal

Past performance and current analysis do not guarantee future results.
Source: AllianceBernstein (AB)

To gauge the opportunity, we will analyze the scale and causes of the extreme dislocation in equity valuations from several perspectives. By determining what it would take for value stocks to stage a sustainable comeback, we can then evaluate the potential payoff for investors who are willing to initiate, expand or rebalance allocations to value stocks today.

*Based on expected nominal US GDP growth of 4.0% in 2023 and a reversion of the value versus growth discount from 53% at the end of 2020 to 32% on December 31, 2022.

Past performance, historical and current analyses, and expectations do not guarantee future results.

Note to All Readers: This document has been approved by AllianceBernstein Limited, an affiliate of AllianceBernstein L.P. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates.

References to specific securities are provided for the sole purpose of illustrating how research can be used to help identify investable ideas in the portfolio-management process and are not to be considered a recommendation by AllianceBernstein L.P. It should not be assumed that investments in any specific security were or will be profitable.

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

The [A/B] logo is a service mark of AllianceBernstein and AllianceBernstein® is a registered trademark used by permission of the owner, AllianceBernstein L.P.

Note to Canadian Readers: AllianceBernstein provides its investment management services in Canada through its affiliates Sanford C. Bernstein & Co., LLC and AllianceBernstein Canada, Inc.

Note to Readers in the United Kingdom: This information is issued by AllianceBernstein Limited, 50 Berkeley Street, London W1J 8HA. Registered in England, No. 2551144. AllianceBernstein Limited is authorised and regulated in the UK by the Financial Conduct Authority (FCA – Reference Number 147956). Note to Readers in Europe: This information is issued by AllianceBernstein (Luxembourg) S.à r.l. Société à responsabilité limitée, R.C.S. Luxembourg B 34 305, 2-4, rue Eugène Ruppert, L-2453 Luxembourg. Authorised in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier (CSSF). Note to Austrian and German Readers: Local paying and information agents: Austria—UniCredit Bank Austria AG, Rothschildplatz 1, 1020 Vienna; Germany—BHF-Bank Aktiengesellschaft, Bockenheimer Landstraße 10, 60323 Frankfurt am Main. Note to Liechtenstein Readers: The Fund is not registered for public distribution in Liechtenstein and, accordingly, shares may only be offered to a limited group of Professional Investors, in all cases and under all circumstances designed to preclude a public solicitation in Liechtenstein. This document may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have personally been sent by AB. Neither the Fund nor the shares described therein have been subject to the review and supervision of the Liechtenstein Financial Market Authority. Note to Swiss Readers: This document is issued by AllianceBernstein Schweiz AG, Zürich, a company registered in Switzerland under company number CHE-306.220.501. This document is directed at Qualified Investors only.

About the Author

Avi Lavi was appointed Chief Investment Officer of Global and International Value Equities in March 2016 and has also been Portfolio Manager for Global Research Insights since May 2016. He has been a member of the Cross Border team since early 2012. Previously, Lavi served as co-CIO of Global Value Equities (since July 2014) and global director of Value Research (since early 2012). From 2006 to 2012, he was CIO of UK and European Value Equities, and director of research for UK and European Value Equities from 2000 to 2006, during which time he helped establish AB’s first research operation based outside the US. Lavi joined the firm in 1996 as a research associate for utilities and expanded his coverage in 1998 to include oil and gas, covering these industries on a global basis. He subsequently became a senior analyst and sector leader for energy research. Lavi was previously an assistant controller at the State of Israel Economic Offices in New York. Prior to that, he was an accountant with Kesselman & Kesselman, PwC’s Israeli affiliate. Lavi holds a BA in accounting and economics from Bar-Ilan University in Israel and an MBA from New York University. Location: London

 

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