We believe value is likely to outperform growth over the coming years—and threats to economic growth from inflation, rate hikes and geopolitical risks do not change our view.

Today’s CIO Weekly Perspectives comes from guest contributors Eli Salzmann and David Levine.

Six months ago, supporters of value investing had a simple argument to make.

The global economy, led by the U.S., was growing rapidly as it reopened from the coronavirus pandemic. Inflation was expected to rise, rousing central banks to end the era of zero interest rates.

Investors who held growth stocks to counter a decade of weak economic expansion, or who had been betting on ever more speculative future earnings because there was no discount rate to penalize them, would now start looking for an exit.

And where were they likely to go? Not to the core indices, which are now dominated by a handful of hyper-successful growth stocks, but likely to value. Here, they could find cyclical companies geared to the recovery, current earnings whose valuation is much less sensitive to rising rates, and reasonable multiples amid a sea of speculative bubbles.

A Strong Case for Value

We always thought this simple argument was a little too simple.

By the end of 2021, inflation was hotter, more persistent and broader-based than many had forecast. Concern that inflation might run out of control, or that central banks might be forced to impede growth with aggressive policy tightening, began to grow. The big fear was that the U.S. Federal Reserve might have to continue to raise rates even after a slowdown had taken hold. Market volatility began to climb.

We anticipated this, and positioned for it—continuing to maintain that there was a strong case for value investing. And that’s why we still do so, even as the war in Ukraine amplifies the threat of lower growth, higher inflation and higher volatility. We continue to believe that the backdrop is tough for growth stocks and more supportive of value.


Why are we skeptical that stalling growth will benefit growth stocks?

We see two reasons.

First, in this cycle, for perhaps the first time in 40 years, slower growth is unlikely to mean lower inflation and lower rates. The Fed may well lose its battle with inflation, but it’s difficult to imagine that it won’t hike rates in the attempt—and higher rates necessarily mean lower multiples for long-duration growth stocks.

Second, even after underperforming U.S. large-cap value by more than 10 percentage points so far this year, U.S. large-cap growth remains substantially overvalued, in our view. We often point out that the difference between the price-to-book ratios of the Russell 1000 Growth and Russell 1000 Value indices is significantly bigger than it was even at the height of the dot-com bubble.

Undervalued Defensive Stocks

Could that mean all traditional value stocks are set to do well?

It’s unlikely. It’s difficult to see how every cyclical industrial business could thrive on weak economic growth and rising input and labor costs. Financials would struggle with a flat or inverted yield curve.

But there is more to a value portfolio than this, particularly as we emerge from such a substantial bubble in speculative growth.

We see undervalued defensive stocks, for example. These are high-quality, cash-generative companies in the health care, utilities and consumer staples sectors—names such as Procter & Gamble—that are rarely available at multiples that tend to attract disciplined value managers.

Years of seeking growth at any price has distracted many investors from just how good these businesses and their everyday products are. Their steady cash flows and generous dividends also make them attractive buffers against both rising rates and market volatility.


In addition, while we anticipate slower growth this year, it’s still the case that the world is emerging from the pandemic. We think that cross-current creates opportunity.

Many travel and leisure companies look cheap, for example, as well as businesses that have more idiosyncratic gearing to the reopening, such as certain orthopedics manufacturers. Some may be relatively cyclical, but we believe their exposure to lockdowns has left them with a defensive valuation buffer.

Ultimately, it is prudent to assume that equity market returns over the next couple of years will be lower and more volatile than they have been over the past three. Having said that, we believe that value is likely to outperform growth, with defensive value and reopening opportunities leading the way over the near term.

We’ve been anticipating and positioning for the current inflation and interest-rate environment, as well as its dampening effect on economic growth, for some time. The crisis in Ukraine tragically exacerbates those conditions. For the time being, it is not enough to change our view—but we are monitoring the situation closely.

In Case You Missed It

  • Japan 4Q 2021 GDP (Final): +4.6% annualized
  • Eurozone 4Q 2021 GDP (Final): +4.6% year-over-year
  • U.S. Consumer Price Index: +0.8% month-over-month and +7.9% year-over-year (core CPI increased 0.5% month-over-month and 6.4% year-over-year) in February
  • U.S. Initial Jobless Claims: +227,000 for the week ending March 5
  • European Central Bank Policy Meeting: The ECB made no changes to its policy stance
  • U.K. 4Q 2021 GDP: +1.1% quarter-over-quarter

What to Watch For

  • Tuesday, March 15 :
    • U.S. Producer Price Index
  • Wednesday, March 16:
    • Federal Open Market Committee Meeting, Summary of Economic Projections and Press Conference
  • Wednesday, March 16:
    • U.S. Retail Sales
  • Wednesday, March 16:
    • NAHB Housing Market Index
  • Thursday, March 17:
    • U.S. Housing Starts and Building Permits
  • Thursday, March 17:
    • Bank of Japan Policy Meeting
  • Thursday, March 17:
    • Japan Consumer Price Index
  • Friday, March 18:
    • U.S. Existing Home Sales

    – Andrew White, Investment Strategy Group