Value or not value?
Fiscal policy. An expression little in vogue in recent years within the esoteric realms of capitalism, nowadays more populated by the devotees of “laissez-faire”. However, the health crisis triggered by the COVID-19 pandemic has brought a major sea-change: the increased role of fiscal stimulus in the policy mix (1), in times when, since the 2008-2009 financial crisis, safeguarding the financial system has been entrusted to the central banks. There are many examples to illustrate this change, from the USD 1.9 trillion stimulus package passed last month to the USD 2.25 trillion infrastructure modernisation plan recently announced by Joe Biden, not to mention the European stimulus plan of EUR 750 billion and possibly even more. Dizzying amounts that may leave one speechless but which should have effects on two key parameters: inflation and long rates.
The markets were quick to take the measure of these colossal policies. This is evidenced by the sharp rise in US long rates in recent months, as well as the steepening of the US curve. After being vilified for years, value management has taken on a new lease of life. The inflationary environment is propitious, as is the steepening of the yield curve. While it is true that the phenomenon is at this stage more pronounced on the other side of the Atlantic, its consequences can also be observed in European stocks trading at a discount, which had similarly fallen out of favour since 2007. But as Seneca tells us, “No tree becomes rooted and sturdy unless many a wind assails it. For by its very tossing it tightens its grip and plants its roots more securely”….
False start or long-term trend?
In 2020, European value management was at a discount of 75% to the rest of the market, the same level as in 2000, against a historic discount of 50%. At the end of March 2021, this discount was 68%. In light of the acceleration in vaccination rates across the world, the economic environment should be more favourable in 2021 and 2022, thus enabling value management to continue playing catch-up.
Value is therefore back in favour, and portfolios have rebalanced somewhat, as until now investors have been too underweight in value stocks. For a long time now, La Financière de l’Echiquier has deployed its value expertise, exclusively or partially, in some of its funds. Historical expertise based on in-depth knowledge of companies, conviction-based management with preference for high-quality, low-debt stocks with good governance. Sturdy stocks capable of withstanding headwinds, proving Seneca right – and astute investors mindful of balance and diversification (2).