Our expert considers claims that value investing could find its time to shine again as the year reaches the fourth quarter.
Value investors have been backed to end 2021 on the front foot after enduring a few weeks where buying cheap stocks has sometimes felt like trying to catch a falling knife.
City firm Liberum notes that quality as an investment style produced the most consistent outperformance during the increased volatility of the past month, with value stocks being their most oversold since the onset of the pandemic in March 2020.
Similar experiences over the past five years have been followed by an average rally of 8.3%, which is why Liberum thinks value is well placed to outperform in the fourth quarter and throughout 2022.
It recommends investors sit tight for a little longer, however, until the fallout from the Evergrande (SEHK:3333) debt crisis and this week's central bank meetings is a little clearer.
The market has been in risk-off mode for much of the last week, although the FTSE 100 index has posted gains of 1% in each of its past two sessions to recover the ground lost in Monday's China-led sell-off.
Risk appetite has been depressed by a more uncertain outlook for China's economy, as well as the threat posed by rising prices and prospect policymakers will soon taper economic support.
In September, Liberum notes that the MSCI UK Value index dropped 4.6% compared with a decline of 1.3% for its growth equivalent.
Analyst Joachim Klement said: “The current market volatility is setting up value stocks for a substantial rebound later in Q4 and into 2022.
“In fact, if the current market volatility subsides relatively quickly, we should see a sustained value outperformance already in Q4 2021. Value investors should use current weakness to slowly add to positions.”
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He is waiting to see how this week's US Federal Reserve and Bank of England policy decisions and developments on Evergrande episode in China develop “before we can aggressively move into value stocks”.
Liberum's selection of cheap UK stocks with high profitability and a market cap below £4 billion includes the Oxford Nanopore backer IP Group (LSE:IPO) and a range of housebuilding stocks, including Vistry (LSE:VTY) and Redrow (LSE:RDW).
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