Insights


Where We See Value Right Now

  • The rebound in value has been least pronounced in North America, in part due to the concentration of expensive stocks (including FANG1 stocks) in that region. 
  • Internet retailers, beverages, biotech, IT software and IT services continue to look relatively expensive, according to our proprietary measures. 

Olivia Engel
Chief Investment Officer

Value investing — choosing stocks that are trading for less than their true economic value — is central to our investment approach, along with measures of quality and market sentiment. As we discussed in our July 2018 commentary, the value theme has yielded a distinct premium over time. Like other investment themes, value is also cyclical. In July of last year, value was in the midst of a long, worldwide period of underperformance.

Since then, value has partially recovered around the world, after experiencing a particularly acute decline during 2017 and much of 2018 (see Figure). This recovery in value is partially linked to the recent high-beta rally in equity markets — a phenomenon we’ll unpack in greater detail in next month’s commentary. In this month’s commentary, we’ll examine what’s changed since value started to turn around in the second half of 2018 and discuss where we see value right now.

Value by Region

A review of the regional performance of our proprietary value measure reveals that value experienced the deepest decline and the weakest recovery in North America. Value has been relatively challenged in North America for two main reasons. First, North America contains the highest concentration of expensive companies (including FANG stocks) that continued to get more and more expensive in early 2018. This is where the underperformance of value was felt most acutely.

Second, cheap companies haven’t performedvery strongly over the past six months in North America. The best segments over the period for value in the regionhave been consumerservices (8%), utilities (8%), and household and personal products (14%) –all reasonably expensive sectors. The worst have been technology hardware (-15%), retailing (-11%), energy (-10%) and banks (-7%) –all on the cheaper side.

Cheap stocks have recovered most compared to expensive stocks over the past six months in Europe. There, the expensive software segment has experienced a very large decline (-13%). Meanwhile,insurance companies, where we see good value, have performed strongly (+3%), and utilities (+8%) have been the strongest performing segment in Europe.

Value by Segment

When we consider value in Active Quantitative Equity, we look for measures that can be used to compare the price of thousands of companies to their fair value and to each other. We have a multi-dimensional view of value that incorporates dividends, cash flows, earnings, enterprise value, among other measures, depending on the industry.

Right now, we see good value in these segments:

  • Airlines in North America and in Asia
  • Road and rail in North America and in Europe
  • Auto components in North America and in Europe
  • Health care providers and Health Care Services in North America and in Japan
  • Insurers in Europe
  • Electric utilities in Europe and in Asia
  • Multi-utilities industry groups in Europe
  • Banks in Asia

Across most regions, Internet retailers, beverageproducers, biotech, IT software and services are the most expensive market segments.Although we believe that value is a crucial investment theme to consider, we also believe that value shouldn’t be considered in isolation. In our view, it’s important to examine quality characteristics, in part to understand whether a given cheap company is in fact cheap for a reason. Other measures can help reveal whether a company’s stock —even if it’s underpriced given its fundamentals —could suffer in the short term due to negative investor sentiment. With this in mind, we’ve also observed the following:

  • There are some cheap large mining companies with reasonably good quality characteristics in Europe and Japan, but near-term sentiment, according to our proprietary assessment, is not attractive enough to warrant a large exposure.
  • Many of the automobile companies are cheap, but their near-term sentiment is very poor, particularly in Europe and North America. Our proprietary analysis of their supply-chain networks also supports the view that these firms are cheap for a reason.

The Bottom Line

Investors who remained invested in value have recently reaped the benefits of their persistence as value bounced back in recent months.As a long period of underperformance in value continues to show signs of turning, we believe it’s important to continue to seek undervalued companies of good quality, while keeping a close eye on short-term investor sentiment. In addition, we think that robust, nuanced and industry-specific measures of value, quality and sentiment, applied across all stocks in the investment universe, are essential to identifying the strongest opportunities.


Where We See Value Right Now


Footnotes

1 The “FANG” acronym refers to Facebook, Amazon, Netflix and Alphabet’s Google. More broadly, “FANG stocks” refer to high-growth consumer and technology stocks as represented in the NYSE FANG+ index.

2 The returns reported represent the sectors within the North America segment of the MSCI World Index for the period between August 31, 2018 to February 28, 2019

3 Source: State Street Global Advisors, as of February 28, 2019. We base this observation on our proprietary, multi-dimensional value scores, and identify these groups as collectively the most expensive segments across three or more regions.

Definitions

Valuestock: A company with solid fundamentals (e.g., dividends, earnings and sales) that tends to trade at a lower price than its peers

High-betastocks(beta>1.0): are typically higher risk, but provide the potential for higher returns; low-beta stocks (beta <1.0) typically have less risk, but also provide lower returns.

MSCI Investable Market Indexes:The MSCI Investable Market Indexes (IMI) cover all investable large-, mid-and small-cap securities across the Developed, Emerging and Frontier Markets, targeting approximately 99% of each market’s free-float adjusted market capitalization.

Disclosures

The views expressed in this material are the views of Olivia Engel through the period ended March 13, 2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially fromthose projected.

Investing involves risk including the risk of loss of principal. Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.

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Providing unique insight into the fixed income market via a snapshot of both fixed income flows and holdings indicators2, extracted from a wider data set that represents $10 trillion of assets3, and PriceStats®, an innovative inflation tool tracking daily price changes of millions of online items.

Providing unique insight into the fixed income market via a snapshot of both fixed income flows and holdings indicators2, extracted from a wider data set that represents $10 trillion of assets3, and PriceStats®, an innovative inflation tool tracking daily price changes of millions of online items.

1 Source: State Street Global Advisors, 31 December 2018.

2 The fixed income flows and holdings indicators produced by State Street Global Markets, the investment, research and trading division of State Street Corporation, are based on aggregated and anonymized custody data provided to it by State Street, in its role as custodian. State Street Global Advisors does not have accessto the underlying custody data used to produce the indicators.

3 Source: State Street Form 10-K, as of 31 December 2017.

4 Bank of International Settlements, 2017.

5 This figure is presented as of 30 June 2018 and includes approximately $32.9 billion of assets with respect to which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.