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The left-for-dead value trade has roared back to life to wipe out all its pandemic losses, with its revival reshaping the US$2 trillion world of factor investing.
The strategy that bets on low-priced stocks and against expensive counterparts has surged back to levels last seen before the onset of the once-in-a-century outbreak, a long-short index from Bloomberg shows.
As the market braces for US$1.9 trillion in fresh U.S. stimulus and an economic rebound spurred by falling virus cases, a deluge of cash has rushed back into cyclical shares whose valuations were flattened by the 2020 doom and gloom.
“Value crushed it for the right reasons,” Evercore ISI strategists led by Dennis DeBusschere wrote in a note.
Exchange-traded funds following the systematic investing style have drawn new money for 10 straight weeks, with inflows and the market rally fueling a US$100 billion jump in assets since the start of November.
These products are on course for their best-ever quarter for new cash and are just US$5 billion away from overtaking their nemesis -- the growth factor -- in assets.
Put another way: A famously misfiring trade for the last decade now looks set to overtake one of the hottest strategies of the bull market.
Value strategies bet on stocks typically at the mercy of the business cycle like Coca-Cola Co. That’s in contrast to growth trades, which are tied to companies seen providing reliable profits over the long haul such as Alphabet Inc.
Now, economic optimism is dragging down havens like bonds, and rising yields are making the near-term cash flows of value equities ever-more attractive.
“The higher that yields go, the more pressure is on that rotation,” Saxo Bank strategist Eleanor Creagh wrote in a note.
With this regime change, investors are abandoning old favorites like growth at a historic pace to scoop up cyclical laggards. In a sign of the strength of the market rotation, a strategy betting that recent winners will keep winning -- momentum -- is suffering one of its biggest-ever losses versus value, according to MSCI global indexes.
Value’s rebound is still minor relative to its underperformance since the global financial crisis. Its price-to-book gap with growth remains more than twice the 25- or 10-year average and not far from the peak that preceded the burst of the dot-com bubble.
While steadfast fans see that valuation gap as a sign the recovery has further to go, to the skeptics that have triumphed for the past decade it’s a reminder that the factor’s woes run deep.
Regardless, those who held onto the strategy through the COVID agony are getting some relief. Take Cliff Asness, the AQR Capital Management co-founder who argued in favor of boosting value bets in late 2019.
He wrote in a paper released last week that it’s misleading to assume value has been dead in recent years based on poor historical returns. Since weak performance has been partly driven by the factor getting cheaper, there’s reason to keep the faith, the quant manager wrote.
That’s as long as one doesn’t think valuations will keep falling, of course.
After its remarkable rebound, the investing style was taking a backseat in Tuesday trading. Instead, battered U.S. tech stocks looked poised for a bounce after losing US$1.5 trillion in less than a month.
But with capital spending recovering, the rally in cyclical shares has room to run even as the rotation takes a breather, according to Evercore.
“The macro backdrop still favors value and price volatility, but the pace of returns should slow,” the team lead by DeBusschere wrote.