A conversation with Nick Kalivas, senior equity product strategist at Invesco, who believes that while there are still headwinds facing Value investors, Value funds are cheap and there are a series of events that can turn the tide for investors interested in playing a Value comeback.
Price
First off, Value looks inexpensive compared to Growth based on historical performance and valuation when analyzing the historical price and forward price-to-earnings ratio spreads of Invesco Pure Value ETF (RPV) to the Invesco Pure Growth ETF (RPG). Currently RPV was trading at a forward PE discount of 10.8 below RPG (10.5 v. 21.3) and the spread is near the lowest in the history.
Government Intervention and Slowdown in Global IT Spending
Second, much of the outperformance from Growth funds since 2016 is primarily due to its exposures to IT, healthcare, and communication services. Given the recent concerns over government intervention in the healthcare system (i.e. rising calls for socialized medicine going into the 2020 Presidential election), RPG’s overweight to healthcare compared to RPV(14.2% v. 5.8%) may provide an edge for Value investors. Moreover, there could also be some headwinds to technology. Gartner recently revised down its outlook for 2019 Worldwide IT spending to 1.1% from 3.2% in January. If the tech sector cools as a result of less global spending, value funds may look more attractive. (RPV is underweight technology compared to RPG 6.1% to 23.5%).
Improved U.S. – China Relationships
Finally, the Invesco Pure Value ETF has shown to outperform Invesco Pure Growth ETF on a 12-month basis when the ISM manufacturing index is rising relative to the year before and on a monthly basis when the 10 year treasury yield is increasing by more than 5% in a month. As such, Value investors will have the potential for success if China’s aggressive fiscal and monetary stimulus lead to improved global growth and a trade deal between China and the U.S. improves the global flow of trade.