Value stocks beating growth stocks

So far this year, value stocks are outperforming growth stocks.

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This is unexpected for the following two reasons, says Peter Hardy, vice-president and client portfolio manager at American Century Investments in Kansas City, Missouri. His firm manages the Renaissance U.S. Equity Income Fund.

• It’s the reverse of what occurred in 2015, when growth stocks were in the lead. When market returns are reasonably good, and when interest rates are falling or low, more stable sectors will usually lag more aggressive sectors. But, “that just hasn’t been the case here in the current environment,” says Hardy.
• Markets returns in the U.S. have been reasonably good since January, he adds (as of September 2^nd, the S&P 500 was up about 8%, and its largest performance dip so far was in July). However, says Hardy, the tables are turning. “The earnings growth picture in the U.S. is somewhat muted, in that S&P earnings have been slightly negative,” he notes. “They’re expected to be single digits going forward.”

Read: How to explain sub-normal growth

Going into 2016, the market was looking forward to a rising-rate environment, explains Hardy. But now, interest rates are likely to remain suppressed. On that front, he adds, “The train never really left the station. While the Fed did raise [interest rates] in December, yields on Treasuries and interest rates broadly have fallen” since then.

Read: How to read the Fed’s signals

Due to uncertainty, investors have turned away from growth stocks. Instead, “the attractiveness of stable businesses and their perceived stable dividend yield has driven returns,” says Hardy.

That’s why market leadership has been in yield-oriented sectors, he adds. As of the end of August, he finds utilities were up over 15% year to date, while telecom was up more than 26% and consumer staples were up by almost 10%.

Read: Consumer staples reaching peak levels

Overall, says Hardy, we’re in an environment where low volatility is desirable. “Many of the stable, high-quality business models that pay dividends are receiving premium valuations,” he notes. Alongside utilities and consumer staples businesses, he favours waste-management companies and REITs.

There’s also been a rebound in energy investment based on recent oil price movements. Hardy points to the rebound of the price of oil to around US$47, compared to February lows of around US$27.

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