PERSPECTIVE3-5 min to read

What’s behind value’s recent renaissance?

Value investor Nick Kirrage explains why investors should be wary of easy narratives to explain market moves.



Nick Kirrage
Co-head Global Value Team

The debate over the value and growth investment styles has been intense in the opening weeks of this year. Value’s relative outperformance has been eye-catching, with the MSCI World Value index returning -1.3% in January compared to -9.3% for MSCI World Growth.

In some ways though, this is just a continuation of last year’s oscillations which saw some periods of outperformance for growth and some for value.

I am somewhat surprised that people are still getting so excited by the growth versus value debate.

What it ultimately comes down to is whether you think value investing works, and what drives it: is it the interest rate environment, politics, a theme, or something else?

Markets change, but people stay the same

My very basic philosophical view is that value investing is based on the one thing in stock markets that never changes: people.

Right now, the human emotional element of markets is as strong as it's ever been. We see over market cycles that people become very positive on shares and very greedy, and then they become very fearful and very scared.

Many people buy into the narrative that as interest rates go up, value historically outperforms. And conversely, that in a low inflation or low interest rate environment, you can justify a higher multiple for growth stocks, which is why they’ve been doing so well. But if you look back over longer time frames – 30 or 40 years – those relationships don’t always hold.

Finding value requires diversification

Looking around the world for value, there are some geographies where it’s harder to find opportunities than others. Around 70% of the MSCI World index is composed of US companies, and the US is at one of its highest ever valuations in terms of cyclically-adjusted price-to-earnings (CAPE) multiples.

According to data from the Schroders Equity Lens, the US CAPE was 38 at the end of December 2021, which is 61% above its average over the last 15 years. CAPE is defined as price divided by the average of ten years of earnings, adjusted for inflation.

History tells us that it’s very hard to make a positive return over the next ten years if you start off by paying those kinds of multiples.

By contrast, a notable trend of recent weeks has been the outperformance of value in Europe. The MSCI Europe Value Index was positive in January, gaining 2.7%.

While Europe is made up of multiple economies that are moving at different paces, many of its companies or sectors are multinational. Healthcare is one example. It’s fairly homogenous globally in terms of the market drivers. However, a company listed in Europe could potentially be exposed to a very different financing background than one in the US, with the European Central Bank likely to be slower to tighten policy compared to other central banks.

That kind of difference could be influential. Ultimately, though, the important point for a stockpicker like myself is to avoid ending up with a portfolio that’s a bet on a single type of macro environment, so diversification is key.

Then there’s China, where stocks had a difficult 2021 and valuations have come down in some sectors. It’s too early to say for certain that value opportunities will emerge in some of the more exciting tech or financial franchises, but it’s definitely one to watch.

Energy sector is about more than the oil price

Turning to sectors, energy is one that performed well in 2021. The typical narrative is that this is due to the rising oil price but it’s more nuanced than that. As oil prices rise, costs tend to adjust to the new normal so it’s not necessarily the case that higher oil prices simply flow through to higher profit margins.

It’s also a nuanced narrative when we come to the debate over energy companies and the climate crisis. Some people will take the view they no longer want to invest in hydrocarbons at all, but on the other hand many energy businesses are well placed to be part of the solution to climate change.

This is going to be a lengthy transition and we will need conventional energy to build the wind and solar farms that produce renewable energy. Some energy companies themselves are investing in renewables capacity.

Then there’s the transition of existing consumer franchises: the infrastructure and forecourts that currently supply petrol but increasingly also electricity for transport.

And while all of that is happening, the oil & gas businesses of these companies will continue to generate cash. This can be used by the company for investment in the transition, but can also be handed back to shareholders. Regardless of oil prices, there’s no reason to assume energy firms will remain lowly valued forever.

Embrace the contradictions

As we can see, wherever we look in markets there are nuances and no narrative is quite as simple as it may appear. But contradiction is helpful for stockpickers. It means opportunity, dispersion, and diversity of ideas.

The changing interest rate environment and its impact on the value and growth investment styles has been a popular narrative in the first weeks of this year. But investors need to be careful of mistaking a correlation for causation.

The history of stock market investing suggests that we need to challenge such prevailing narratives and look elsewhere for the justifications about why certain stocks and sectors are doing well and others are doing badly.

Ultimately, if you buy decent businesses with long-term business models and reasonable balance sheets at good prices, there's always the potential for investment returns to be made.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.


Nick Kirrage
Co-head Global Value Team


Nick Kirrage
Alpha Equity
Market views
Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Fund related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.