Cliff Asness of AQR Capital Management
Earlier this month, Asness released a blog post which simply contained a chart showing the spread in valuation of value stocks versus growth, suggesting that value stocks will continue to outperform growth for the foreseeable future. The title of the wordless blog post read, “This is it, this is the blog.”
The wordless blog of Asness
The post also contains four footnotes to explain the graphic. It is a composite of five metrics: book value / price, earnings / price, forecast earnings / price, value of sales to the business, and value of cash flow to the business. The chart consists of 70% developed markets and 30% emerging markets.
Asness explains that the gap between value and growth is “extremely broad” in the United States, but broader in emerging markets. He added that the spread had narrowed very slightly this month as the value continued to do well, “but that doesn’t change the chart above more than a strand.”
The founder of AQR noted that a critical consideration of when value will outstrip growth is the catalyst. Asness looks back on times like the peak of the tech bubble in March 2000 and points out that we still don’t know the catalyst for it to stop there.
“While the timing is always tough, we believe the odds improve with the wildest prices, and the expected returns in the medium term are improving as well,” he said.
Is Asness finally right about value stocks?
The problem with the long-standing debate over value versus growth stocks is that value advocates have been arguing for value stocks for some time. They all say it’s the year for value to finally outstrip growth. By 2021, the value supporters were finally right, for part of the year. However, Asness isn’t the only fund manager who believes 2022 will be an even better year for value stocks.
Gerard O’Reilly of Dimensional Fund Advisors said CNBC earlier this month, they are maintaining their long-term view and advising their clients to consider orienting their portfolios towards small-cap and value stocks in 2022. O’Reilly said that even after years in where small caps and value outperformed large caps and growth, as in 2021, the next 12 months “tend to be pretty good for small and value”.
CNBC notes that the small cap Russell 2000 was lagging behind other major indexes. However, the Russell 2000 Value Index outperformed the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite and gained on the Nasdaq 100
Why might value hedge funds finally be right about value?
Other market players have declared CNN that they also expect 2022 to be a banner year for value stocks. Lisa Shalett of Morgan Stanley Wealth Management expects more debate on valuations and the direction of inflation. This should be good for value stocks and cyclicals, but bad for technology when the Federal Reserve starts to raise interest rates. She believes tech stocks are getting “more tired and overcrowded.”
Higher interest rates could reduce earnings growth for many of the most popular tech companies, and the Fed is starting to scale back its bond buying program, which could also weigh on the industry. Shalett is also concerned about the possibility of increased regulations and crackdowns against Big Tech.
On the flip side, supporters of dynamic stocks argue that some big tech names are starting to trade more like value stocks than growth names.