Value shares are popular again on global markets

investmentnews.com:

One of last year’s hottest quant trades is getting a reboot, even as it misfires in the world’s largest stock market. 

So-called value shares — which trade at lower multiples relative to fundamentals — are all the rage again but this time in Asia and, more recently, Europe. 

Investors are essentially betting that global interest rates will stay higher for longer without torpedoing economic growth. In Japan, cheap-looking shares have outperformed so-called growth equities by a beefy 17 percentage points on a total return basis, MSCI indexes show. That comes amid growing expectations that the Bank of Japan is closer to ending its historic monetary-easing campaign. 

In other parts of Asia, the investing style has won out by 7 percentage points. In Europe, a resurgence this month has put cheap shares in the lead for 2023.

For so-called factor investors who slice and dice shares by how cheap they look, the strategy’s overseas gains are softening the pain from losses over in the US — where an extraordinary AI boom is instead boosting shares touted for their long-term growth promise. On Wall Street, value has trailed growth by 30 percentage points, set for the worst annual performance since the 2020 pandemic crash.

“In this new higher-for-longer rates regime, cheaper stocks should have more chance to outperform, especially if they deliver stronger earnings as they have been doing most recently,” Barclays Plc strategists led by Emmanuel Cau wrote in a note.

While the link between economic trends and quant factors is contentious among specialists, value shares are generally expected to outperform when rates rise along with the economic outlook because they offer near-term cash flows. That’s reflected in the sector leaderboard