Value

Energy shares have been obliterated. So too, banks. Once muscled-up bulwarks of the broader index, the mighty have since been dumped in the ditch. ‘ExxonMobil booted from the Dow after close to a century’ headlined the FT in late August, tying a pretty pink bow on the whole sorry affair. For banks, down almost 40% YTD, the sector is in the throes of posting its worst full year of relative performance in nigh on 84 years. According to brokers, give or take 75% of banks trade below their tangible book value. That is a lot of banks offering – on the face of it – some very good value. With valuation spreads as wide as they have ever been and post-Covid signs the inflationary current has turned, have the banks and energy shares printed their cycle lows? Indeed, at a time when equities, credit and government bonds are all expensive, such value stocks may be the only ‘cheap’ assets left to buy. All you need to see is some inflation to fully scatter the pigeons. For money managers, this is likely to be a defining call for the coming years. Value is not dead, but for those that have lost defensive moats or where investment has flicked from tangible to intangible assets, value is likely impaired. Nuance is required. So too deep fundamental work to weed out the weak. When inflation returns, which is possible given the extent to which policy has eased from the monetary to the fiscal, then a shopping list will be needed. Banks may struggle given the new policy environment of all-in central banks, but energy – given all the revulsion and lack up upstream exploration capex – may yet see a turn. Commodities more broadly would certainly see a bid, so too others with a cyclical leaning – where supply levels have reset and inventories are bare. Investors, though, don’t have to dip a rod in the traditional value pond where many secular challenges may continue to overhang. Covid has prised open valuation opportunities in many other pockets of the market where the longer-term is perhaps more rosy: from hotels to medical technology – companies not in the traditional ‘value’ space but ones which offer substantial upside in a normalised economy. There have been deep structural reasons for why value hasn’t worked for the past decade, but that will change if inflation turns up. It may still be a big if, but the implications for portfolios if it does, are even bigger.