Industry Voice: How Value Can Flex to Shifting Market Dynamics

Agility to offer cyclical and defensive opportunities

clock • 3 min read
Industry Voice: How Value Can Flex to Shifting Market Dynamics

Key points

  • Broadly, the market backdrop for value investing remains favourable, with both near‑ and long‑term factors providing support, but volatility could return.
  • An active value approach can help negotiate shifting market dynamics to target cyclical opportunities and provide more defensive positions when volatility rises.
  • In the near term, indicators suggest that equity markets may be returning to earnings as the main driver of equity performance.

Markets have started 2023 strongly as some of the headwinds that dominated markets in 2022 have started to dissipate. China has reopened its economy faster than expected; warm weather in the euro area has eased concerns over natural gas shortages; and recent data from the U.S. have pointed to continued growth, moderating inflation, and a slower pace of Fed rate hikes. Combined, this has caused market consensus to lower the probability of a synchronized global recession in 2023. That said, although the outlook has improved versus last year, we are still likely to see volatility in equity markets as they continue to react to differing macroeconomic and earnings data points. However, with value offering a combination of defensive and cyclical attributes, we believe the style is well positioned to negotiate shifting market scenarios. 

Key Value Drivers Continue to Persist 

The backdrop for value remains favourable, with both near‑ and long‑term factors providing support. Valuations remain relatively attractive versus growth stocks, even after oversized outperformance versus growth stocks in 2022. We are, however, witnessing a more subdued value opportunity set compared with the abundant opportunities we found in the past. It is also likely that we may see risks of broad earnings downgrades as margins are pressured by inflation and low growth. Equity markets may once again return to earnings as the main driver of equity returns. Companies offering profits resilience and those able to pull levers to protect shareholder returns are likely to be rewarded. With value offering both a healthy representation to defensive areas, such as utilities and other traditional industries with strong pricing power, but also to economically sensitive areas like industrials, we believe investors are less likely to be left behind if markets move in a particular direction. 

 

 

This post was funded by T. Rowe Price

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Key points

  • Broadly, the market backdrop for value investing remains favourable, with both near‑ and long‑term factors providing support, but volatility could return.
  • An active value approach can help negotiate shifting market dynamics to target cyclical opportunities and provide more defensive positions when volatility rises.
  • In the near term, indicators suggest that equity markets may be returning to earnings as the main driver of equity performance.

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