2023 has been a tough year for Value investors. Growth stocks ($VUG) are up 23% for the year to date, while Value stocks ($VTV) are down 1%. The 24 percentage point performance differential erases most of the 30 percentage point advantage that Value stocks enjoyed over Growth stocks in 2022.
The outperformance of Growth has been led by hype about Artificial Intelligence. The so-called Big 7 US Tech stocks (Apple, Microsoft, Google, Amazon, Nvidia, Meta, Tesla) are up 61%.
At the same time, Value stocks have been hit by lower oil prices and US bank troubles.
From a longer-term perspective, we remain firm optimists on Value. Value stocks are currently so cheap that they can be expected to significantly outperform Growth stocks over the next 5-10 years. This outperformance “may exceed 50% cumulatively” as the value spread normalises.
When might Value stocks outperform again? We have sympathy for the view expressed by Paulo Macro, who argues that the market could continue to rally over the next 6 weeks.
The AI bubble could then start to deflate, leading to outperformance of Value stocks at the moment when investors expect it the least – namely, on the precipice of a mild recession in the second half of the year.
This counter-intuitive scenario is the one the portfolio is positioned for. The main risk the portfolio runs is the loss of financial stability in Europe, either because deposit flight spreads from US to European banks, or because the creditworthiness of some European country deteriorates.
US Real Estate positions were sold, European and South Korean banks bought.