Investors are turning once again to value stocks, as they move away from racier growth options after the equity market corrected last week, according to a leading Middle Eastern banker.
The trend comes on the heels of central banks’ plans to tighten their monetary policies by hiking interest rates and slowing down COVID-19 stimulus programs.
According to a recent Financial Times article, MSCI’s index of value stocks in Europe rose almost 5 per cent in the first three weeks of 2022 on a total return basis.
The MSCI broad equity index represents large and mid-cap equity performance.
“Whenever there is stock market volatility, people will seek stability. Value stocks provide that element compared to growth stocks,” said Aziz Nader, vice president of capital markets at FFA Private Bank, in an interview with Arab News.
Expectations of interest hikes for the coming year and inflation are affecting stock market stability and more specifically growth stocks, he added.
Higher interest rates are viewed as negatively impacting growth companies because they erode the current value of their projected future earnings, in opposition to value stocks, explains Nader.
Investors are now banking on undervalued and more stable stocks. Business publication Fortune, underlines that value stocks’ price/earnings ratios, the standard affordability measure, tend to be low, which makes them relatively cheap.
“A good place to look at now for investment in value stocks is Europe,” says Nader.
European companies such as energy leaders BP and Royal Dutch Shell, and financial groups HSBC and Allianz, are among the big value stocks to have posted significant gains in 2022, the Financial Times report highlights.
Additionally, funds holding European financial stocks have attracted $1.4 billion in new client money so far this year, according to the report, quoting Bank of America.
Value stocks were also the most popular investing theme for this year among 106 institutional investors informally surveyed by Bloomberg News in the first half of December. Value stocks are considered as companies that are priced inexpensively compared to their profits or book value
Until now, value stocks lingered behind growth stocks such as technology.
Growth stocks around the world have shown 22 percent annual returns including dividends over the past five years, versus 9.8 percent for value, indexes compiled by MSCI Inc. show, according to a Bloomberg report.
However, concerns over central banks ending support measures to world economies during the pandemic and expectations of rising interest rates to stem inflation are reversing the trend.
Fast-growing but more speculative US tech shares have witnessed heavy selling this year, according to the Financial Times.
This has created instability in the markets. According to Market Watch, the Nasdaq Composite entered correction last Wednesday, ringing up a fall of at least 10 percent from its recent November 19 peak. On Friday, the Nasdaq Composite stood over 14 percent below its November high, while the S&P 500 was down 8.31 percent from its Jan. 3 record.