27 January 2020
The companies that have led the global equity market recovery in the past decade come from different areas. In the US, innovation from companies in the Technology and Communication Services sectors (often referred to as FAANGs + Microsoft) has driven the upward trend. In Europe, the expanding reach of luxury retail brands into new markets has helped established companies in the Consumer Discretionary space.
The common theme in stocks that have “worked” in developed markets during the recovery is companies that have shown growth (primarily with consumers) as the real economy recovered. At the same time, idiosyncratic regional challenges in the traditional value sectors, such as Industrials (US) and Financials (Europe), have led to relative underperformance.
As we enter a new decade, one question on every investor’s mind is whether or not value investing will continue to underperform the broad market indices. There has been a calming of headwinds facing companies in the US (global trade uncertainty) and Europe (Brexit uncertainty). Meanwhile, valuations in the stocks that have “worked” are getting increasingly stretched, leading investors to re-think value.
In Q4 2019, we saw investors put money to work in European-listed value factor ETFs (see Figure 1). Despite the challenges remaining in the US (election year) and Europe (negative interest rates), we believe investor flows demonstrate a willingness to reduce underweights to value, following a decade of underperformance. As investors continue to think about adding value back into their portfolios, they should consider how strategies such as Value Exposure Select can help to avoid value traps.
How does an Exposure Select strategy help investors play value while avoiding value traps?
Investors using value strategies to take advantage of cheap stocks need to protect their portfolios against stocks that are cheap for a reason. 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 offers a suite of Value Exposure Select strategies in both US and European exposures.