Value Investing Back In Favour

Value investing consists of buying unappreciated or ignored stocks which have good fundamentals and are available at attractive prices. Value investors seek stocks that are priced attractively relative to a stock’s intrinsic worth. For instance, they look for stocks selling at temporarily low multiples relative to their book value, cash flow, earnings or sales. The idea of investing in such names is that while these stocks may be beaten down at present, eventually as the market wakes up to the worth of these names, the stock prices will rise. As a result of this approach, most often value investing will tend to keep away from investing in names which are in vogue at a given point in time. [EasyDNNnews:PaidContentStart]

So, it is very likely that value investors may have to face weeks, months or even years of lacklustre performance or until the time when the market begins to take notice of the attractiveness of a given company or sector. Hence, patience becomes a crucial tool when it comes to value investing. Over the last couple of years, Indian stock markets have witnessed a spate of IPOs at seemingly very high valuations. At a time when investors were lapping up growth stocks, there was significant interest even in high PE multiple names. 

As a result, technology, speciality chemicals and paints were major gainers. This was so because some of these sectors benefitted from strong tailwinds such as lower oil prices. The point an investor here has to remember here is that all this was largely possible due to global central banks pumping in record amount of money which eventually caused significant distortion in asset prices. Now, with the tide turning given the elevated oil prices and interest rates only those companies with efficient capital management will thrive in the period ahead. This has led market participants to shift their focus back to value pockets.

The Road Ahead
Over the last one year, several earlier left out pockets such as power and infrastructure have come back on the investors’ radar. Not only were the headline names in these sectors strong fundamentally, they were also available at very cheap valuation. This has been the reason why cyclical sectors such as coal, energy and metals that tend to benefit from the impending broad-based growth and which were once ignored by investors have made a comeback. Historically, value investing tends to work well in times of inflation and this time seems to be no different. 

Over the last six months when inflation has been steadily heading higher, the performance of value funds too has improved. In India, basic sectors that one cannot live without such as power, telecom, consumer staples and pharmaceuticals were the ones in which astute value fund managers were investing into. And each of these pockets took off postpandemic as a result of which value funds post-pandemic staged a strong comeback. Similarly, in the US markets, given the new high inflation environment, investors are increasingly shunning Facebook, Amazon, Apple, Netflix and Google (FAANG) stocks and are opting for old economy sectors like oil, large-scale retailers, health insurers and pharmaceuticals but not biotech, to name a few.

Tips for Investors
The market set-up looks like it will favour value funds in the next few years due to recovery of the cyclical economy. Thus, investors with long-term horizon can consider investing in value funds. The catch is that the turnaround story could take some time, so patience is of essence. Even though on a valuation basis the Indian equity market is no longer cheap, at all points in time there will be pockets where there is value. For an investor looking to invest in a value fund, there are a few established names in the category one can consider. While selecting a fund, remember to check its long-term track record. There may be stretches when the fund may underperform but once that phase is over the outperformance thereafter often tends to be very sharp. So, if investing in a value fund, invest and sit tight for a fruitful wealth-creation journey.

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