After underperforming growth shares for the better part of 10 years, value shares are shining bright in the new year.
Since the opening bell on 4 January, the S&P/ASX 200 Growth Index is down 7%. Meanwhile, the S&P/ASX 200 Value Index has gone the other way, up 6%.
All together the S&P/ASX 200 Index (ASX: XJO) is down 5% in 2022.
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Why are value shares outperforming growth shares?
Much of the shift in investor sentiment has come following the realisation that inflation is running higher than most economists had forecast last year. That's leading to inevitable interest rate rises, which hits growth shares harder, as they're more dependent on future earnings.
The prospect of rising interest rates helped propel the steep losses among tech shares last month. And in turn, it's seen ASX value shares benefit.
In The Australian Financial Review, Perennial Value portfolio manager Stephen Bruce said:
Now that better growth and higher inflation seem to have become entrenched, the rate tightening cycle has finally started. This has meant the de-rating of the expensive parts of the market. How far this continues will be a function of growth, inflation and rates.
Is the ASX value shares party just getting started?
While ASX value shares have well-outpaced growth shares in 2022, what can investors expect going forward?
Dougal Maple-Brown, head of Australian equities at Maple-Brown Abbott, believes there's a long way to go yet:
We've had a pretty good run. Value has underperformed for almost a decade, but the one-year numbers are now looking really good. We think there's still something left in the tank because while the extremes have been hit, there are some stocks out there with a lot of excess still. The valuation dispersion is still very wide even though it's come back a fair bit, so we think there's a long way to go.
Bruce also believes the brighter run for ASX value shares is a long way from over:
Given how historically low rates are and how extreme valuation dispersion in market has become, there could potentially be a long way for this to run yet.
Flows are definitely starting to improve, but there hasn't been any massive shift back towards value yet. I think investors, both retail and institutional, have all become very underweight value over the last number of years. So potentially, there could be a significant reallocation if this rotation continues.
By the numbers
To give you some idea of how leading ASX growth shares have stacked up against value shares, Pointsbet Holdings Ltd (ASX: PBH) – a growth share favourite that gained 1,137% from 20 March 2020 through to 19 February 2022 – is down 28% in the new year.
Fellow growth share, Appen Ltd (ASX: APX) has struggled as well, down 22% so far in 2022.
Then there's leading ASX value share, QBE Insurance Group Ltd (ASX: QBE), which has seen its shares gain 7% year-to-date.
