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Waman Virgaonkar

Waman Virgaonkar

Vice President, MSCI Research

Hitendra D Varsani

Hitendra D Varsani

Managing Director, MSCI Research

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Reopening Economies and the Resurgence in Value

  • Value indexes have, on average, outperformed their parent indexes during recovery and expansion phases of the economic cycle, but overall have had a challenging time during the last 15 years.
  • What is different this time? Economies are reopening, long-term interest rates and inflation expectations have been increasing recently and the valuation of value is low in a historical context.
  • Inflows into value ETFs have outpaced inflows into growth ETFs in the last six months.

After 15 years of challenging performance, investors are questioning whether value is still a valid investment strategy. However, the reopening of the global economy following the rollout of COVID-19 vaccinations has reignited interest in value strategies, be it among stocks, sectors, countries or regions. The exhibit below illustrates active returns of the MSCI World Factor Indexes in various recovery periods, as well as the information ratios (IR) in different macroeconomic cycles.


Factor Performance (IR) Differed Across Shorter Periods

From November 1997 to March 2021. As a proxy to measure macroeconomic cycles, the macro states reflect changes in and absolute levels of the U.S. purchasing managers' index PMI, and we measure the subsequent performance of factors conditioned on the level of the indicator at the start of the holding period. The macro regime is decided based on the current value of PMI-50 and the three-month change in PMI. Change>0, Level<0 = Recovery. Change>0, Level>0 = Expansion. Change<0, Level>0 = Slowdown. Change<0, Level<0 = Contraction.


During economic recovery and expansion phases, value and low-size indexes have realized higher IRs in comparison to other factor indexes. The selected time periods reflect occasions where the global purchasing managers' index (PMI) bottomed out and crossed 50 (a PMI reading above 50 suggests improvement). Value has outperformed on these occasions with the exception of the recent COVID-19 period, where the outperformance started only after Pfizer Inc. and BioNTech SE announced on Nov. 9 that their vaccine was more than 90% effective in preventing COVID-19.1


Value’s Lost Era

While value investors may be scarred by the last 15 years, we analyzed several issues to see if conditions have changed.

Economic indicators: In 2020, the global economy had the largest drop since the Great Depression,2 and economic indicators have rebounded since (see the exhibit below on the Institute for Supply Management’s manufacturing PMI). In Q4 we saw value outperform in almost every region around the world, and the trend has continued into this year as well, with the MSCI World Enhanced Value Index outperforming its parent index by 9.11% in the year to date. Traditional value sectors financials and energy — which have been exposed to rising oil prices and rising rates, respectively — have been the best-performing sectors YTD.


Macroeconomic Regimes Based on ISM Manufacturing PMI

Data from November 1997 to February 2021. The macro regime is decided based on the current value of PMI-50 and the three-month change in PMI. Change>0, Level<0 = Recovery. Change>0, Level>0 = Expansion. Change<0, Level>0 = Slowdown. Change<0, Level<0 = Contraction.


Interest-rate and inflation expectations: In previous research, "Factors in Focus: Impact of Inflation on Style Factors," we have shown that higher inflation and higher rates have coincided with value outperformance. Since March 2020, U.S. inflation expectations have been rising, and while 10-year U.S. Treasury yields have risen since August 2020, this trend has accelerated in the last few weeks.


Interest-Rate and Inflation Expectations Have Been Rising Since the Second Half of 2020

The exhibit shows the 10-year U.S. breakeven-inflation and U.S. 10-year constant-maturity Treasury rates. Source: Federal Reserve Bank of St. Louis


Valuations: From the Dec. 7, 2020, vaccination rollout through March 29, 2021, the MSCI World Enhanced Value (+7.53%) and MSCI World Small Cap (+5.5%) Indexes outperformed the MSCI World Index. This suggests that investors expect the global economic recovery will gather pace. The valuation of the MSCI Enhanced Value Index compared to its parent benchmark was at extreme lows in both Europe and the U.S. at the end of February.


MSCI Enhanced Value Indexes’ Valuations

Ratio of price-to-forward earnings of the MSCI Europe Enhanced Value Index with the MSCI Europe Index, the MSCI USA Enhanced Value Index with the MSCI USA Index and the MSCI World Enhanced Value Index with the MSCI World Index from June 2003 to February 2021.


Was There Value in Selecting Sectors and Countries?

It’s been well documented that, overall, market valuations are elevated. But is this the case everywhere? Before we highlight which sectors and countries had lower valuations compared to their histories, we first review the performance of sector- and country-selection asset-allocation strategies based on time-series valuation metrics. Overall, we find that value from sector and country selection followed a similar pattern from value in stock selection. These asset-allocation strategies have also registered a negative return since 2010, meaning that sectors and countries with higher valuations fared better than those with lower valuations — partly due to the outperformance of information technology (IT) and the U.S.


Sector and Country Selection Based on Time-Series Valuation

Rotation-strategy performance from June 2008 to February 2021. The strategy selects the top tercile of sectors or countries every month with equal weighing. Valuation metrics used are price-to-book, price-to-earnings, price-to-cash-earnings and price-to-forward-earnings ratios.


Which Sectors and Countries Have Historically Low Valuations?

A majority of sectors and countries showed negative exposure to value, meaning they were expensive relative to their histories over the last five years. In Europe, consumer staples, communication services, energy and financials had lower relative valuations than IT, consumer discretionary and industrials. Within the U.S., utilities, telecom services, consumer staples and energy had lower valuations than industrials and consumer discretionary. In terms of countries, the U.K., Switzerland, Austria, Belgium and Italy had lower valuations compared to Japan, France, Hong Kong, the U.S. and the Netherlands.


Value's Resurgence?

The recovery and early expansion phases in the macroeconomic cycle have historically favored value stocks,3 and their performance over the last three to six months may catch investors’ eyes. ETF investors, for example, have been repositioning their portfolios. The exhibit below shows that cumulative cash flow in value ETFs has exceeded USD 30 billion over the last one-year period, while growth-ETF cash flow was flat.


Value and Growth ETFs' Cumulative One-Year Flows

All data as of Feb 26, 2020; defined as each share of an ETF, as identified by a separate Lipper ID. Only primary listings, and not cross listings, are counted. MSCI does not guarantee the accuracy of third-party data.


Is this the start of a long-overdue shift in value performance? While the macroeconomic environment, and relative valuation of the value factor itself, is like no other seen in the last 20 years, it remains to be seen whether this is a short-term bound or a longer-term structural shift in factor leadership.



1Hopkins, J. “Pfizer’s Covid-19 Vaccine Proves 90% Effective in Latest Trials.” Wall Street Journal, Nov. 9, 2020.

2Gopinath, G. “The Great Lockdown: Worst Economic Downturn Since the Great Depression.” IMF Blog, April 14, 2020.

3The analysis and observations in this report are limited solely to the period of the relevant historical data, backtest or simulation. Past performance — whether actual, backtested or simulated — is no indication or guarantee of future performance. None of the information or analysis herein is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision or asset allocation and should not be relied on as such.



Further Reading

Factors in Focus: Val-come Back! Shifting Factors as the Cycle Turns

Value-Performance Anxiety

Adaptive Multi-Factor Allocation

Factors in Focus: Impact of Inflation on Style Factors

Are (Stock) Bubbles Rising?