In uncertain times, value stocks remain relevant

Value stocks will stay relevant in the near term because there are just too many ways the economy could continue to struggle, says Caroline Edwards of Putnam Investments.

Edwards said value stocks will serve a balancing function in portfolios if growth’s current run is threatened by stubborn inflation, geopolitical concerns or a sputtering economy in 2024.

“The argument for value is that we don’t expect this is going to be a runaway market for growth,” she said. “There are a lot of variables in place that make us think value will continue to be relevant.”

Among those variables: the ongoing conflicts in Europe and the Middle East, potential impacts on the energy sector and resultant supply chain disruptions, and a U.S. economic performance that belies the weak fundamentals.

“We saw a GDP print that was just about 5% year-over-year growth. That is crazy! These are really, really high numbers. We don’t think [inflation] is going anywhere when you have a GDP at near 5%,” she said. “We think this is going to be choppy. You’re going to see bouncing around and some flare-ups.”

Edwards said in the first part of 2023, growth stocks were fueled by AI.

“You saw a real appetite for risk, and an appetite for any name that had artificial intelligence attached to it,” she said, adding that markets left value behind during that period.

“The value index through the first half of the year really didn’t do anything inspiring,” she said. “It’s not that they were weak or down significantly, but that’s not where you saw those strong market returns.”

During the third quarter, all styles were generally weak, as investors took a step back from that risk-on appetite. In recent weeks, there was a surge in stock values on news of a softening in the labour market and that the Fed would pause its rate hikes — both signs that inflation is winding down.

For 2023, value stocks landed in the “good enough” zone, with the Russell 1000 Value index up about 6%.

“That is fine in the end for us, we’re still able to find some ideas,” Edwards said. “But it’s not where you see a lot of those ‘growthier’ stocks that have performed much stronger than that.”

A number of factors have held value stocks back, she said, including all the excitement about AI and obesity drugs, which benefited mainly growth stocks.

Disruptions in the financial space in March, when several U.S. regional banks floundered, didn’t help value stocks either, with investors fearing heavy-handed regulations would be introduced to prevent a recurrence of bank illiquidity.

“It seems like a long time ago but we’re still paying the price for it,” she said.

On the bright side, energy markets have been a surprising source of strength for value funds.

“We saw a lot of relative strength out of the energy stocks in 2022 and going into 2023,” she said.

Value investors do best, she said, when they play the long game and are extra careful in down markets.

“We think about all those intro-to-finance mantras, that if you’re down 50% you have to gain 100% just to go back to where you were. That’s something that’s always in the back of our minds. So, performing on the downside, for us, is really critical.”

She’s also a big advocate of finding “multiple ways to win.”

“Try to find stocks that have maybe two or three parts of their thesis. They can work at different times. And if one part of the thesis doesn’t work out, the stock isn’t a dog. It’s not going to totally collapse,” she said. “That’s really building in a margin of safety.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.