Deutsche Bank Says the Value Stocks Rally May Have Gone Too Farby
Analysts say outperformance versus growth stocks ‘overdone’
Economic trends don’t support continuation of the rally
One of the surest investing strategies of recent months is coming unstuck.
Analysts at Deutsche Bank AG are calling time on the outperformance of European value stocks. They’re predicting a cooling-off in the growth expectations that have boosted these shares, selected for their cheap earnings multiples, and recommend investors assume an underweight position.
“Value stocks’ relative performance over the past twelve months has been significantly stronger than the rebound in global growth momentum and the overall market performance would have suggested,” the strategists including Andreas Bruckner write in a client note. “We prefer growth over value stocks.”
After a decade in the doldrums, value shares began to rally hard last year, spurred by bets on stronger economic activity -- something to which they’re especially sensitive. Yet they’ve started to lag again in recent weeks, as investors reassess their views on the impact of President Donald Trump’s policy proposals.
Stocks like Standard Chartered Plc., Centrica Plc. and Statoil ASA, which are classified as value stocks by MSCI, hold a sell rating from Deutsche Bank analysts, having risen faster than the rest of the market over the last three months. By contrast, a large handful of so-called growth stocks -- including Shire Plc., Vodafone Group Plc. and Assa Abloy AB -- are rated buy.
UBS Group AG also expressed caution about value stocks. In a note last week, strategists including Karen Olney reiterated their "tactical pause" recommendation on the rally. Among their rationales were European political risk and a need to see proof of rising earnings.
The relative performance of value shares has closely tracked the rise in bond yields, particularly in the U.S., but the relationship has stalled in recent weeks. That makes the main risk to Deutsche Bank’s underweight call a further rise in yields and a restoration of the relationship, the analysts said.