Value stocks trading at ‘huge discount’ to growth

Value stocks, once disadvantaged compared to growth stocks, are now trading at a huge discount, creating opportunities for discerning investors, says Lenny McLoughlin of Irish Life Investment Managers.

The chief investment strategist for the Dublin-based firm said after more than a decade of tailwinds for growth stocks, economic conditions are shifting in favour of value investing.

“Value over the very, very long term has traditionally outperformed growth stocks. The last 10 or 15 years has probably been the exception to the norm,” he said. “The environment that we’ve been in has been beneficial to growth stocks. But when we look forward, that seems to be changing — and changing in favour of value stocks.”

McLoughlin said lower discount rates have been used to value the kind of long-term cash flows offered by growth stocks. That advantage is waning now that both interest rates and inflation have increased significantly around the world.

Promising themes

He is also expecting increased interest in thematic funds, especially those that mirror megatrends that promise superior long-term returns.

“We think there are parts of the growth area that will do well,” he said, among them environment endeavours, technology disruptors, and innovations in health products and services.

With concerns about the environment continuing to dominate headlines, increased interest in renewable energy is inevitable, he said, adding that a resurgent emphasis on developing new sources of clean energy will open up opportunities for investors.

“Everybody’s aware — corporates, investors, politicians — of the risks to humanity and investment markets if the climate issue isn’t addressed,” he said. “This is a theme we fully believe will continue to be favoured by investors.”

“When we look back over time, ESG has shown itself to be [a] steady, consistent outperformer,” he said. “We believe that will be the case going forward.”

He pointed out that there has been underinvestment in renewable energy in recent years, which he said will inevitably reverse as climate concerns grow. “We think this increased interest and demand for ESG products will continue going forward.”

In terms of tech disrupters, McLoughlin said innovation is driving progress in both tech sectors and non-tech sectors.

“We think they could provide strong long-term levels of growth in various areas,” he said.

On the health and society front, he said growing populations, changing demographics, increasing longevity are all creating long-term opportunities in areas such as healthcare, pharmaceuticals, transport, and food services. 

He said the wide array of opportunities supports a diversified investment approach.

“A diversified portfolio is well worth having in an environment where surprises in particular events or assets are still quite possible,” he said. “When certain assets like equities and bonds underperform, if you didn’t hold other assets such as alternatives or cash or commodities, you would be vulnerable to significant losses.”

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