“All investing is value investing” according to Charlie Munger, with today’s market continuing
to offer more value from the mispricing of existing company assets relative to growth assets.
Firstly it is important to point out that exceptionally cheap value stocks are not unique to the
US stock market – it is a global phenomenon that has accelerated with the coronavirus crisis
(first chart). Secondly, there are a number of ways to show that the value vs growth ratio is not
as extreme as it seems, such as in the top-right chart we can see that the spreads between P/
Es and return on equity are far off dot-com levels. Further, the bottom-left shows that value
vs growth behaviour is so far very similar to the rally after the 1987 bottom. Unlike other
market bottoms, 1987 and today have not seen a wave of creative destruction and industry
consolidation that typically allows surviving value companies to re-rate higher.
Nonetheless, we have seen a confluence of other factors that suggest value vs growth is biased
higher. Upside inflation risks this cycle have become more likely with greater fiscal dominance.
If long-term lenders demand more compensation for inflation risk, then this will cause the yield
curve to steepen. A steeper yield curve (represented through swap rates as the Fed may cap
long-term UST yields) is a key input for our value vs growth model in the last chart, as many
value stocks are financials that capture higher net interest margins with a steeper yield curve.
Source: Bloomberg, Macrobond and Variant Perception