2023 has been a tough year for Value stocks. The Value stock index ($VTV) is down 5% for the year to date, while the Growth stock index ($VUG) is up 11%. This is a complete reversal of 2022, when Growth stocks lost 33%, Value stocks only 2%.
Our strategy, which focuses on Value stocks, has returned +7.6% for the year to date. It has thus has easily beaten the Value stock index, but has lost to the Growth stock index. This is an OK performance in the circumstances.
The poor performance of Value stocks in 2023 is due to a worsening economic outlook. Value stock indices are overweight banks and oil companies, which tend to do badly in recessions.
The last two week’s events in the banking industry have thus had a very different impact on Value and Growth indices. Value stocks are down 5% this month, while Growth stocks are up 2%.
The one time that you do not want to hold Value stocks, despite their attractive valuations, is when a recession starts. Today may potentially be one such time. So, to protect the portfolio, we sold most of our banks and oil positions a week ago.
The portfolio is now positioned in defensive Value stocks from the Healthcare, Telecom and Utilities sectors. Last week we also added a position in two Gold companies. Gold typically does well if interest rates and the US dollar go down, and so it is a hedge against the combination of economic weakness and high inflation.
We expect to stay defensive for the next few months until the economic situation stabilises. This is a temporary measure – usually our strategy invests in riskier securities. It may be that if recession fears intensify, a “last great entry point into inflation, value, small cap trades” (in the words of Michael Hartnett, a market strategist at the Bank of America) will materialise, providing investors with a chance to earn attractive and possibly very substantial returns from the economic recovery later this year.
2023 performance YTD
@triangulacapital +7.6%
$SWDA.L +2.4%
Portfolio changes
Positions were opened in gold miners Barrick Gold and Newmont Mining Corp and the utility Enel.
