Catch up and a cuppa with Thomas Moore

Is value making a comeback?

When we talk about investing styles, we usually talk about ‘growth’ and ‘value’. Growth styles favour high quality stocks that have above average growth prospects and are expected to earn a lot more in the future.

‘Value’ styles, on the other hand, generally favour unloved companies, where share prices look cheap relative to their fundamental value.

Value investing has been a thankless task for a number of years now. After a decade characterised by low economic growth, ultra-low interest rates and central bank intervention, investors have been willing to pay more for stocks which have the potential to grow more than the economy.

But is the tide now turning? We caught up with Thomas Moore, manager of Standard Life Investments UK Equity Income Unconstrained fund to find out his thoughts on the subject:

Market shift

“The growth bandwagon seems to be stuttering,” Thomas said. “This is significant because it marks a shift in the market’s focus from sentiment to fundamentals. Many of our holdings had languished in the first half of 2018 for no obvious reason other than that they were on the wrong side of this growth/momentum play.

“The market backdrop now feels very different. The overdue sell-off in overvalued growth stocks has reversed the buyers’ strike in value stocks. As a result, positive surprises are finally being rewarded in higher share prices. We see the potential for a coiled spring effect in many of our holdings, as investors are forced to reflect improving fundamentals in higher valuations.”

The future looks more promising

“I see significant potential for the portfolio to outperform from here. This is based on my view that there is significant valuation mispricing among a wide range of UK stocks.

“The surge in growth stocks – in particular technology and consumer staples companies – has created value opportunities and we are positioned to take advantage of these opportunities. We have maintained our focus on cash flow and dividends and we are finding plenty of value stocks that offer attractive cash flow and dividend prospects.

“The scope for surprise in cash flows and dividends is elevated, considering how low valuations are. Conversely we see a significant risk for investors in the lofty valuations of growth/momentum stocks. Being valuation-aware has been out of fashion for some time, but we think this will change.

“I strongly believe that the starting valuation paid for a stock will be a key determinant of its ultimate return.”

What is the trigger?

“Some commentators are asking ‘what is the trigger?’ for growth stocks to give way to value stocks. Investors have an inkling that the valuations of growth/momentum stocks are outlandish, but what is to stop them becoming even more outlandish?

“Nobody truly knows the answer to this question. Possible triggers include a pick-up in nominal GDP growth, inflation and bond yields (all of which are now happening, by the way). But these are not essential ingredients for a change in market leadership. Expensive stocks will ultimately de-rate if their results fail to live up to the hype, while cheap stocks will re-rate if they don’t disappoint.

“History would suggest that when sentiment turns, the move can be quite violent, particularly when valuations are as stretched as they are now.

“It is noticeable that market leadership is becoming narrower (for example, not all the FAANG stocks are still doing well). It is also interesting to see highly-rated growth stocks being clobbered when they disappoint (Facebook, Twitter and Purplebricks to name but a few).

“We may look back on these as tell-tale signs of a peak in the euphoria. The next leg will be a reversal in fund flows away from these cult stocks.

“For the first time in years, the cards now feel stacked in favour of active investors who actually care about what valuation they pay. We are ready for this rotation – bring it on!”