
Many investors believed the dot com bubble was a one-off, with never to be repeated dispersion in valuation within the equity market.
In European equities today the gap in valuation between value stocks and growth stocks has now marginally eclipsed the March 2000 peak.
Below we show two non-cyclical measures of value: price to book and price to sales. These charts use MSCI Europe Growth vs MSCI Europe Value with data going back 25 years. Each chart shows the premium in the market for growth equities over value equities in percentage terms since 1995. We show the mean over the period with standard deviation bands either side. Today growth is approximately 3 standard deviations more expensive than value. In absolute terms the price premium is more than double the 25 year average.
If we look at cyclical measures of value, incorporating forward earnings estimates, the picture is similar, with growth equities approaching 3 standard deviations more expensive than value equities. In absolute terms once more the premium is more than double the average since 1995.
This historical context shown in the charts above is important in helping navigate the recent volatility between value and growth. Since mid-August 2019 value began outperforming growth in Europe, performing strongly in September and October. But it has started the year on a weak note.
What might be driving the recent expansion in the premium for growth stocks?
It is possible that the drop in value versus growth is front running a large drop in bond yields that is about to materialise. This cannot be ruled out, but more likely technical factors are playing a role.
At the start of the year many investors make changes to portfolios and add cash. Investor sentiment has improved sharply over recent months and cash balances have fallen. When sentiment changes quickly, momentum strategies can benefit. Fast flows have likely poured into the winners of the last 12 months, supporting expensive growth and hurting value. Given the record dispersion and limited fundamental support, this phenomenon should not last long.
The LF Lightman European Fund has strong earnings growth expected in 2020 and 2021 with an EPS CAGR of 9% over the period. The fund has a forecast dividend yield of 3.91% in 2020 and 4.32% in 2021, with a median PE of 13 this year, and 11 next year.
The premium for growth stocks and the discount for value stocks in European equities today has no historical precedent. This record polarisation should be exploited. The recent dip for value should be viewed as an historic entry point.
Sources:
Bloomberg
Legal
Disclaimer:
This document is owned by Lightman Investment Management Limited (“Lightman”, “we”, “us”). Lightman Investment Management Limited (FRN: 827120) is authorised and regulated by the Financial Conduct Authority (“FCA”) as a UK MiFID portfolio manager eligible to deal with professional clients and eligible counterparties in the UK. Lightman is registered with Companies House in England and Wales under the registration number 11647387, having its registered office at c/o Buzzacott LLP, 130 Wood Street, London, United Kingdom, EC2V 6DL.
Target audience:
This document is intended for ‘Eligible Counterparties’ and ‘Professional’ clients only, as described under the UK Financial Services and Markets Act 2000 (“FSMA”) (and any amendments to it). This document is not intended for ‘Retail’ clients and Lightman does not have permission to provide investment services to retail clients. Any marketing document is only intended for ‘Eligible Counterparties’ and ‘Professional’ clients in the UK, unless it is being used for purposes other than marketing, such as regulations and compliance etc.
Collective Investment Scheme(s):
The collective investment scheme(s) – LF Lightman Investment Funds (PRN: 838695) (“UK OEIC”, “UK umbrella”), and LF Lightman European Fund (PRN: 838696) (“sub-fund”, “UK product”) referenced in this document are regulated collective scheme(s), authorised and regulated by the FCA. In accordance with Section 238 of FSMA, such schemes can be marketed to the UK general public. Lightman, however, does not intend to receive subscription or redemption orders from retail clients and accordingly such retail clients should either contact their investment adviser or the Management Company Link Fund Solutions (“Link”) in relation to any fund documents.
The collective investment scheme(s) – Elevation Fund SICAV (Code: O00012482) (“Lux SICAV”, “Lux umbrella”), and Lightman European Equities Fund (Code: O00012482_00000002) (“sub-fund”, “Lux product”) referenced in this document are regulated undertakings for collective investments in transferrable securities (UCITS), authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg. In accordance with regulatory approvals obtained under the requirements of the Law of 17 December 2010 relating to undertakings for collective investment, the schemes can be marketed to the public in Luxembourg and Norway. Lightman, however, does not intend to receive subscription or redemption orders from any client types for the Lux product and accordingly such client should either contact their investment advisor or the Management Company LINK FUND SOLUTIONS (LUXEMBOURG) S.A. (“Link Lux”) in relation to any fund documents.
Accuracy and correctness of information:
Lightman takes all reasonable steps to ensure the accuracy and completeness of its documents and its contents; we however request all recipients to contact us directly for the latest information and documents and issued documents may not be fully updated. We cannot accept any liability arising from loss or damage from the use of this document.
Wherever the document refers to a third party such as Link, Northern Trust etc., we cannot accept any responsibility for the availability of their services or the accuracy and correctness of their content. We urge users to contact the third party for any query related to their services.
Important information for non-UK or non-EEA persons (Including US persons):
This document is not intended for any person outside of the UK or the European Economic Area (EEA). Lightman or any of the funds referenced on this document are not approved for marketing outside of the UK or the EEA. All non-UK and non-EEA persons must consult their domestic lawyers in relation to services or products offered by Lightman.
Risk warning to all investors:
The value of investments in any financial assets may fall as well as rise. Investors may not get back the amount they originally invested. Past performance is not an indicator of future performance. Potential investors should not use this document as the basis of an investment decision. Decisions to invest in any fund should be taken only on the basis of information available in the latest fund documents. Potential investors should carefully consider the risks described in those documents and, if required, consult a financial adviser before deciding to invest.
Offer, advice, or recommendation:
No information or document on this document is intended to act as an offer, investment advice or recommendation to buy or sell a product or to engage in investment services or activities. You must consult your investment adviser or a lawyer before engaging in any investment service or product.
GDPR:
Lightman may process personal information of persons using this document. Please read our privacy policy on our website.
Copyright:
The content on this document cannot be distributed or reproduced without our consent.