Earlier this week, consumer price inflation for the Eurozone slowed to 10% year-over-year for November, down from 10.6% in October and below the 10.4% consensus forecast by economists, marking the first decline in over a year. Data from the Australian Bureau of Statistics also showed a slowdown in inflation to 6.9%, from 7.3% the month before. The data support the view that surging global inflation appears to have finally peaked.
Growth stocks led the sharp rally in US stocks on the last trading day of November, and the S&P 500 ended the month at the highest level since mid-September. Value stocks, however, have outperformed growth by 19 percentage points year-to-date (based on MSCI All Country World indexes). With inflation still well above central banks’ targets, we maintain our preference for value over growth stocks.
Inflation may have slowed, but it remains elevated. While recent inflation data have shown an encouraging moderation, they remain at decades-high levels. Extrapolating too much from a single month’s data can also be risky, as some of the more volatile components can easily tick higher again on a month-over-month basis. In the Eurozone, core inflation was still on the rise in November, while services inflation in the US remains elevated. Historically, value outperformance has been associated with inflation above 3%, and we only expect inflation to fall below this threshold toward the end of 2023.
Growth stocks are still expensive in relative terms. Although growth stocks have clearly fallen a long way in absolute terms, their valuations remain unattractive, in our view. The MSCI World Growth price-to-earnings (P/E) multiple at 20.2x remains higher than its long-term average of 18.6x. Value stocks’ P/E multiple at 10.6x, however, is below its long-term average of 12.6x.
Relative earnings growth supports value stocks. While both value and growth stocks have seen earnings downgrades throughout the year, value is holding up better in relative terms. With central bank policymakers remaining on the hiking path, we believe value outperformance should continue amid elevated rates. In fact, in the 12 months following the Federal Reserve’s last rate hike in a cycle, value has historically outperformed growth by an average of 4 percentage points.
So, we continue to favor global value stocks in our equity strategy, with energy being one of the preferred sectors. Regionally, we like the cheaper and value-oriented UK and Australian equity markets relative to US equities.
Main contributors - Mark Haefele, Daisy Tseng, Claudia Panseri, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - Value outperformance to continue despite slowing inflation, 2 December 2022.