The decade-and-a-half long growth equity dominance has come to an end. Valuation can no longer be ignored.
Valuation-oriented investors have had to endure a long market cycle of (eventually) high-priced, high-growth equity outperforming their more stable, lower-priced quality counterparts in the market. Sometimes, it has felt like being in endless detention, like in John Hughes’ iconic coming-of-age movie The Breakfast Club. You’re there killing time with some other kids while the drunk-on-authority Vice Principal threatens: “I’ve got you for the rest of your natural born life if you don’t watch your step!”
In addition to earnings, the most obvious driver in this cycle has been the interest rate level. The zero-rate policies ushered by the financial crisis of 2008 sustained a rally for growth equity worldwide for nearly 15 years. Clearly, the interest rate cycle trend changed again after supply-chain issues in the pandemic ignited inflation in 2020 and central banks started raising policy rates two years later coinciding with energy prices chocks brought on by War in Europe 2022. During this same timeframe value and valuation-orientated equity started outperforming its growthier cousin.
The decade-and-a-half devaluation of value equity has made it relatively cheaper than ever. The value bull is born on pessimism and grows on scepticism. We feel this is where we are now: coming to the end of detention, value equities being John Bender, the true heartthrob of the movie, declaring to his peers, “Sweets, you couldn’t ignore me if you tried!”
At the end of this blog post, you can find our Talking Points for January 2024. The document is Evli’s International Team’s outlook on the current opportunities in the market. This edition focuses on the opportunities in our Global Equities offering. Here are some exciting things to consider:
Whilst relapses might occur (with periods of growth again outperforming value) even seemingly endless detentions eventually come to an end. We believe valuation-focused investors’ decade-and-a-half-long ordeal in the equity markets has turned from being held hostage by the high-growth momentum to enjoying the sweet returns their attractive valuations imply. The value equity is finally free, walking out of detention across the field, one fist held high.
Your Breakfast Club, aka Evli’s International Team
* GEM = Global Emerging Markets
** P/FCF = price to free cashflow
*** Magnificent 7 = Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla
See above slide and further in depth info about the opportunities in our Global Equities offering here.