Will 2017 be a year contrarians will forget?

Will 2017 be a year contrarians will forget?
  • David Stevenson
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2016 was the year of the value stock, but could some investors be wrong-footed in 2017?

Some hints at an answer to this ongoing narrative can be found in the detailed data presented by the various index firms at the end of last year. 

For me, the most interesting numbers came from MSCI, which diligently broke down its index universes into style boxes including Value Weighted, High Dividend Yield, Equal Weight and Momentum, ­not forgetting Quality stocks.

According to MSCI, Value Weighted stocks romped ahead globally, with a 13.2% return compared to 8.5% for the benchmark MSCI ACW index.

MSCI Value Weighted index is best-performing in 2016

High Dividend Yield stocks came a close second with an 11% return, followed by Equal Weighted stocks on 9.3%. Minimum Volatility stocks underperformed with an 8.1% return, but the wooden spoon prize belongs to Quality stocks on 6.1% and Momentum stocks on 4.8%.

Looking at current valuations, the most expensive type of stock is currently Minimum Volatility with a forward P/E of 18.1 and the cheapest, Value Weighted with a forward P/E of 13.2, while the overall market (ACWI) is on 15.7.

These are global numbers but once we dig down into different geographies some more granularity emerges.

The second half of last year produced the best numbers for value stocks in Europe, especially after President Trump's win had a knock-on effect on financials - the archetypal value sector. 

The MSCI Europe Value index outperformed the MSCI Europe Growth index by close to 15% between the end of July and end of December 2016.

This impressive outperformance was echoed in hedge fund land where variations on the theme of value investing ­through activist and event-driven strategies both beat the S&P 500 for the year. 

Smart-beta investors 'dip their toe' back into value strategies

There is a long list of explanations for this story of consistent outperformance, not least the revival in financials in Europe. 

Many value funds also benefitted from an optimistic stockmarket experiencing earnings growth upgrades, which in turn had the effect of lifting up all boats - including the more distressed. 

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