There are many strategies used by Australian investors. Each comes with its own list of pros and cons.
Some common strategies include:
- Growth investing: focuses on buying stocks of companies expected to grow earnings or revenue faster than the overall market
- Dividend investing: focuses on buying stocks that pay regular cash dividends, providing a steady income stream along with potential capital appreciation
- ETF investing: focuses on exchange-traded funds (ETFs), which are baskets of securities traded on exchanges that offer diversification and typically track an index
While these strategies are all viable, a new report from VanEck has shed light on the broader market conditions that are making it favourable to return to a focus on value investing.
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What is value investing?
Value investing is an investment strategy that involves buying stocks that appear to be trading below their intrinsic value, often identified through fundamental analysis and popularised by investors like Benjamin Graham.
When investors target value stocks, they look for companies perceived to be trading at bargain prices relative to their underlying business performance.
The idea underpinning value investing is that, over time, stock prices will reflect their intrinsic value. If a share's price drops below its inherent value, it will eventually "correct" and move higher again.
Value investors seek to profit over time by capitalising on these minor corrections in the share price.
According to VanEck, value investing was the go-to approach from the 1970s to the GFC.
This was an era when interest rates and inflation were elevated, which saw investors gravitate towards those companies trading at lower valuation multiples and strong tangible cash flows, contributing to outperformance relative to growth companies.
The case for value investing in today's market
VanEck said there are several signs that suggest we could be in the early stages of a value market.
Firstly, inflation pressure could stay elevated.
The ongoing oil crisis, alongside other factors such as historically high global government debt, could sustain inflationary pressure in the US, with potential global spillovers. While markets have priced in a quick resolution to the US-Iran conflict, oil prices remain up more than 56% from six months ago.
VanEck said elevated oil and commodity prices have historically been a leading indicator of higher inflation.
Additionally, the US economic growth outlook is still resilient.
Despite a number of growing pains including mounting fiscal debt, tariff disruption, a shrinking labour force following immigration policy pivot and an ongoing war with Iran, the US economy still looks resilient with a stable growth outlook at ~2% real growth and a probability of recession of only 30%.
Finally, value companies offering compelling valuations.
Despite strong performance for value, it is trading at levels close to its 10-year average. From a relative value perspective, valuations also hit a multi-year low relative to broader equities (proxied by MSCI World ex Australia Index), indicating ample headroom on the upside.
How to target value shares
For investors seeking exposure to value shares, one option is to use value-focused ASX ETFs.
Two such options include:
- VanEck MSCI International Value ETF (ASX: VLUE) – gives investors a diversified portfolio of 250 international developed market large and mid-cap companies, with high value scores
- Vaneck MSCI International Value (AUD Hedged) ETF (ASX: HVLU) – The currency-hedged version of the above fund
