Will value’s run prove non-transitory?

Research Signals - May 2021

Inflation fears remain the main theme in global markets, though major equity markets have extended their gains for the year. Investors are increasingly optimistic on an improving economic outlook, including that captured by a strong upswing in the J.P.Morgan Global Manufacturing PMI, led by solid expansions in the eurozone, UK and US. However, the survey continues to point towards increased inflationary pressures, as confirmed by the steepest rise in input costs for over a decade and record inflation of selling prices. While Fed officials maintain the view that inflation is largely driven by transitory factors, similar questions remain on the transitory nature of another key theme to markets surrounding the staying power of the current value cycle (Table 1).

• US: Strong performance was posted across value factors, including Book-to-Market for large caps and TTM Free Cash Flow-to-Enterprise Value for small caps
• Developed Europe: Forward 12-M EPS-to-Enterprise Value was a top performing Deep Value factor, while Rational Decay Alpha sat at the opposite extreme of Price Momentum factors
• Developed Pacific: In Japan, investors have consistently taken on higher risk, as confirmed by negative spreads to 60-Month Beta in 10 of the last 12 months
• Emerging markets: Investors demonstrated a renewed interest in large cap names, as gauged by Natural Logarithm of Market Capitalization, in addition to firms with high 2-Year Ahead EPS Growth

Table 1

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