Value Stocks a Week Away From ‘Holy Grail’ Momentum Boost

Value stocks are morphing into their once-feared momentum rivals, a shift that could accelerate in coming weeks and give their rally a fresh boost.

Next Tuesday marks the 12-month anniversary of the MSCI AC World Value Index’s eight-year low, a key timeframe that many quantitative models use to screen for momentum shares to buy. May 6 would be the six-month anniversary of the relative low for value stocks against their growth and momentum peers -- their outperformance began after the election of U.S. President Joe Biden.

Value Stocks a Week Away From ‘Holy Grail’ Momentum Boost

“There is a significant overlap emerging between deep value stocks and momentum stocks -- there are a number of autos, banks, materials, and energy stocks which are screening as both value and momentum,” wrote Bernstein strategist Sarah McCarthy in a note Wednesday. “This is the holy grail of quant and value investing.”

Biden’s victory and his immediate calls for further stimulus sent investors rushing to buy stocks exposed to a jump-started economy and the prospect of rising inflation. That meant a switch to long-overlooked value shares such as those in the financials, energy and industrials sectors and away from high-priced technology stocks, which had dominated momentum investing for most of the last decade.

The global value stock gauge has jumped 22% since Nov. 6, while the equivalent growth index is up just 8%. The MSCI AC World Momentum Index -- which is up 5% over the same period -- chooses its members based on a combination of 12-month and 6-month performance, according to its factsheet.

Momentum bets are popular within the roughly $2 trillion systematic community, which groups stocks together by their characteristics, an approach known as factor investing. Exchange-traded funds tied to momentum command $20 billion in the U.S. alone.

The overlap between value and momentum for certain stocks hasn’t happened since 2016, “the last period of short but meaningful value outperformance,” according to Bernstein. “We are tactically long value and think there is further to go.”

©2021 Bloomberg L.P.

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