Why the value rotation still has years to play out

A rotation from growth to value will take years to play out for a generation of investors that has only known low interest rates, says senior fund manager CLIVE BEAGLES

• Rotation from growth to value underway
• Corporate activity could be next trigger
• Investors slow to embrace change

A STOCKMARKET rotation from growth to value could take years to fully play out, with corporate action likely to be the next catalyst for investors, says senior fund manager Clive Beagles.

Many investors sold down high-growth stocks like big US tech firms over the past year as higher interest rates reduced the future value of their earnings.

But despite a dramatic selldown that shaved trillions from market values, investors are only at the start of a reorientation in markets that could last up to three years, believes Beagles, an UK equity income manager with our London-based sister company J O Hambro.

“There’s a generation of fund managers who have only ever lived in a world of zero interest rates and very low discount rates and it’s taking them a long time to recognise that this is a regime shift,” he says.

The gap between average valuations of US and UK-based companies is evidence of how far the changeover has left to go, he says.

UK shares are trading at an average price earnings ratio roughly half their US counterparts as the war in Ukraine overshadows a robust local economy and better-than-expected company reporting season.

“The UK has the greatest exposure to the value factor of any developed market,” he says.

Value gap may trigger corporate activity

This relative value is starting to trigger corporate activity, says Beagles.

The UAE’s First Abu Dhabi Bank is reported to have been considering an all-cash bid for banking icon Standard Chartered.

Anglo-Dutch energy giant Shell has been mulling a move to the US.

Cement and concrete producer CRH unveiled plans to move its main listing from London to New York, sending its shares up 7 per cent on the day of the announcement.

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“This could be the sort of thing that jolts investors into realising quite how ridiculous this valuation gap between the UK market and other parts of the world has become,” says Beagles.

“Standard Chartered is an interesting example. As far back as 50 years ago, it was one of jewels in the crown of the UK market — listed in London but exposed to high growth markets in Asia with a very interesting geographical footprint.

“It has been struggling for years and is now trading on about half its book value. First Abu Dhabi trades at two times book value — so you can see what they are trying to do.”

Reports of Shell considering a move to the US markets also indicate that corporate activity can be the catalyst to realise investment opportunities.

“In terms of the geographical footprint, there’s not much to choose between Britain’s BP and Shell and their US peers Exxon and Chevron.

“But the US peers trade on anywhere between 50 to 75 per cent premiums. There’s no logic to it.”

Trend to value has years to play out

Beagle says this indicates the trend towards value stocks has some years to play out.

“It is taking investors a while — the UK has been deemed to be this sort of Jurassic Park market where companies go to die for some time.

“This is why I come back to: does it need one of our banks to get bid for? Does it need one our big oil companies to get bid for?

“If you have two or three come along in quite short order that might be the thing — investors have been very slow to embrace the change.”

Beagles says the recent corporate earnings season in the UK saw a mix of solid results and muted outlook statements.

But he says better-than-expected dividends indicate that corporate Britain is in good health.

“That’s the ultimate manifestation of business confidence, isn’t it? It reflects strong balance sheets and demonstrates what companies really think about the world.

“Consumer confidence in the UK is almost at a one year high, so despite all the misery they read in the newspapers, people are just getting on with their lives.

“Retail spending has generally come in better than people would have expected, and we’ve still got this massive cushion of £270 billion in savings.

“There’s a little bit of noise about currency, with sterling rallying off its lows, and there’s a little bit of noise around interest costs for companies that are heavily levered – but overall things are looking pretty good.”

About Clive Beagles

Clive Beagles is a senior fund manager with UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

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