(Bloomberg) -- After a major outperformance versus growth shares this year, value stocks are starting to lose their appeal as bond yields peak and economic recovery grinds to a halt, strategists at Credit Suisse Group Inc. and Bank of America Corp. warned.
The two banks downgraded their recommendations on cheaper, so-called value shares on Friday, with Credit Suisse strategists cutting them to benchmark after having been overweight since May 2020, while BofA strategists slashed European value and bank stocks versus growth to underweight.
“We think we have seen most of the rise in the US TIPS yield,” Credit Suisse strategists led by Andrew Garthwaite wrote in a note. “Value has caught up with cyclicality,” adding that cheaper shares are “very overbought” right now and that growth tends to outperform when earnings revisions turn negative or Purchasing Managers’ Index falls sharply.
BofA strategists expect the economic slowdown and declining bond yields to weigh on European value equities and instead raise quality stocks to overweight.
“Our projections of slowing growth and fading nominal bond yields are consistent with 10%+ underperformance for banks and value versus growth stocks by early next year,” strategists led by Sebastian Raedler wrote in a note. “If bond yields overshoot, this is unlikely to support banks or value if it is driven by real rates alongside weaker growth.”
Value shares have been largely shielded from this year’s market selloff, which has been led by growth stocks and tech in particular, as investors turned to cheaper equities in search of shelter amid fears of rising rates. The MSCI World Value Index is down just 5.3% in 2022, compared with a slump of 17% for its growth counterpart.
Still, Credit Suisse strategists continue to favor so-called dividend aristocrats, which show consistent payout growth, including the likes of Sanofi, Unilever Plc, Diageo Plc, Air Products and Chemicals Inc., Coca-Cola Co. They’re not yet completely abandoning cheaper stocks as European value still trades at a 45% discount to growth and earnings revisions for the factor are beating those of growth shares.
Not everyone agrees that the value’s time is over. At Morgan Stanley, strategists including Alix Guerrini say that this is only the start of a “new era” of long-lasting outperformance for European value shares as bond yields remain elevated and as quantitative easing normalizes.
“The recent pick-up of value should mark the beginning of new trend rather than a short lived reaction,” they said in a note, favoring defensive value over cyclical value shares. “The valuation dispersion still looks extreme and investors still structurally overweight growth and underweight value, this backdrop should provide large upside for the factor to re-rate.”
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