LONG CHEAP VALUE/SHORT EXPENSIVE GROWTH OPPORTUNITIES REMAIN COMPELLING ACROSS COUNTRIES 1
As of 5/31/2022 | Source: MSCI, GMO
The market has spent much of 2022 worrying about inflation and associated interest rate rises, and Growth stocks have certainly borne the brunt of this. With MSCI ACWI Growth down an ugly 21% for the first five months of the year and MSCI ACWI Value having only fallen 4%, we are increasingly being asked whether it is too late to invest in GMO’s Equity Dislocation Strategy.
Although it appears that the long cheap Value/short expensive Growth train has indeed left the station, we believe that there is still plenty of track remaining before it reaches its destination. At least until very recently, the insatiable desire for Growth equities had pushed valuation disparities to levels not seen since the peak of the Internet bubble. Unlike that period, however, this one has permeated much more widely, touching all sectors (as we wrote about in April) and all countries.
The chart above shows the opportunity set at the end of May using GMO’s “Price to Fair Value” (P/FV) ratio, the valuation metric underlying the Equity Dislocation Strategy. We have simply divided the average P/FV of the most expensive fifth of stocks by the average P/FV of the cheapest fifth of stocks within each country/region, showing where we are today compared to the median value (and an indication of the range of values) through history.
Looking at MSCI ACWI as a whole, the ratio of Price to Fair Value for cheap stocks relative to expensive stocks sits at the 9th percentile since 1990. This indicates that there is still a tremendous amount of scope for cheap to outperform expensive in order to return to a more normal valuation differential.
Although there are a couple of exceptions, it is heartening to see that the opportunity remains broad based across the globe, with the majority of the world exhibiting a spread of valuations around the 10th percentile. Our Equity Dislocation Strategy focuses on the extremes of valuation and so, in most cases, the blue dot, which represents the shorts/longs in the Strategy, is meaningfully higher than the more broad-based country or region metric.