Finding Value in Stocks, Despite Omicron, to Close the Year
Value stocks have fallen out of favour recently, with investors decreasing positions, after a strong start to the year.
The short-term impact of the Omicron variant may present an opportunity to re-engage the value trade and position portfolios for the long-term trend of economic recovery.
SPDR® offers a complete range of ETFs tracking World, Europe and USA Value Exposure Select indices for investors seeking to take advantage of value stocks, while using a ‘light quality touch’ in stock selection.
Equity markets have responded negatively since the emergence of the new Omicron variant of the COVID-19 virus. The anticipated response of global governments to the spread of this new variant may cause both consumer and producer activity to decrease in the short term. This development has forced investors to re-consider their long equity positions heading into year end. The short-term volatility in stocks presents an opportunity for investors if the longer-term recovery trends remain in place (i.e. increased consumer activity, resolution of labour and supply chain dislocations).
At this time last year, investors were significantly underweight value stocks. The pandemic forced low interest rate policies from central banks and accelerated structural trends, such as remote working. These factors contributed to growth stocks being perceived as relatively safe positions. The news that a COVID vaccine would soon be widely available triggered months of relative outperformance in the value trade1, as value stocks were seen as a way to play the recovery of economic activity.
Investors are once again underweight value. The preference for high quality growth stocks has driven the price of their earnings higher in recent years (see Figure 1). While investors have benefitted from higher return on equity in growth stocks (see Figure 2), we fear that these trends may slow or reverse in 2022.
The catalyst for a reversal could be if central banks pursue a normalising of interest rate policy, driving long-term interest rates higher. This is already being signalled by the US Federal Reserve, which recently announced a potential acceleration in the reduction of asset purchases and planned rate hikes to combat the strong inflation statistics.
Figure 1: Relative Price to Earnings (Last 10 years)
Figure 2: Relative Return on Equity (Last 10 years)
As investors prepare for the end 2021, with an eye toward positioning for Q1 2022, it would be prudent to weigh both the short-term risks of Omicron volatility and the longer-term trend of economic recovery. If the long-term recovery is not significantly interrupted, then the short-term volatility presents a significant opportunity for investors to benefit from reducing the underweight in value stocks and positioning for upside potential. We would recommend investors use quality to their advantage, by considering a selective approach to playing value stocks.
How does an Exposure Select strategy help investors play Value while avoiding traps?
Investors using value strategies to take advantage of cheap stocks need protect their portfolios against stocks that are cheap for a reason. Value Exposure Select strategies can allow investors to access strong value factor exposure, while seeking to avoid value traps by using a light quality touch.
SPDR® ETFs has always offered a suite of Value Exposure Select strategies in both US and European exposures. We have expanded the range to include a global version of this exposure through the SPDR® MSCI World Value UCITS ETF, which tracks the MSCI World Value Exposure Select Index. To learn more about the ETF, and to view full performance history, please visit the fund page.
1 The SPDR® MSCI World Value UCITS ETF outperformed the MSCI World Index by approximately 7.2% in Q1 2021. Source: FactSet as of 1 January 2021 to 31 March 2021.
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