The value rotation is on pause in the US, but not in Europe
It feels distant now, but just last month the high market drama was the rotation to value. One exaggerated headline in a major publication hailed it as the biggest since 1995. Since then, though, markets have had bigger problems. An indeterminately hawkish Federal Reserve and Russia-Ukraine tensions are keeping everyone on edge.
It’s not so surprising, then, that the US value rotation has taken a breather. Assets held in large-cap value ETFs have grown a brisk 4.3 per cent year-to-date, but that has recently slowed to a trickle, according to Jefferies data. Since late January, the Russell 1000 growth and value indices have traded close together:
The most immediate backdrop is the growing appetite for safety. Gold is beating just about everything else. The latest Bank of America fund manager survey found the highest share of cash holdings since May 2020. Perhaps investor anxiety has put the value rotation on ice?
That story is harder to see in European equities, where the pivot to value is chugging along. Despite some wobbles in the last few days, European value continues to outperform growth:
When we last discussed it in January, US value was still outperforming growth, just at a slower clip than Eurovalue. At the time, Schroders research head Duncan Lamont gave us two possible explanations:
- The European value index depends more on financials and energy
- European growth’s valuation gap over European value has gotten extreme
A month later, the first point looks bang on. In absolute terms, energy stocks in the S&P 500 value index beat their counterparts in the MSCI Europe value index this year. But in weighted terms, European energy’s contribution margin to the Europe value index was 47 basis points higher than the US energy equivalent. The story is broadly similar for financials.
The second point is harder to judge, as valuation data is published less frequently. Bloomberg estimates show Europe’s valuation gap — the difference in forward P/E ratios between growth and value indices — shrinking since late 2021, though this is subject to sharp quarterly revisions.
It’s early, but the value rotation in Europe looks firmer than in America. Which is not to say that the US rotation is doomed, but that more needs to go right. In Europe strong bank and energy stocks, set to gain from rising rates and oil, can do the heavy lifting, whereas other US sectors will need to pitch in. We’ll keep an eye on this.