Value Investing: Capitulation or Opportunity?

LAGOS (Capital Markets in Africa) – Value stocks trade at prices below their fundamental value. If prices of stocks converge towards their fundamental values then it is natural to expect value stocks to outperform their more expensive peers, at least on average. This outperformance is known as the value premium.

Value stocks have severely underperformed in recent years, leading many investors to question the relevance of value investing or even to contemplate its demise. However, in this paper, we show that the spreads between the valuations of value stocks compared with those of the most expensive stocks have been expanding in all regions and macro-sectors. By the end of 2020, these value spreads reached the same extremely high levels last seen at the peak of the tech bubble in 2000. When looking ahead, the probability that value spreads will compress is now at their highest since their last peak spread 20 years ago.

Moreover, we show that value stocks and multi-factor strategies tend to outperform in periods of value spread compression. We thus believe that capitulating on value investing or exiting
multi-factor strategies may turn out to be a costly decision.

Here is the link to the paper tagged Value Investing: Capitulation or Opportunity?