Looks Like a Turning Point for Value…

Graham Campbell and David Keir discuss the effect of the COVID vaccine on equity markets…

We have written extensively about the current valuation extremities within equity markets and the long period of under-performance of ‘Value’.

In our recent Quarterly review, we highlighted several potential catalysts that could occur in Q4, namely; the US Election, a likely stimulus package from the new administration, perhaps more from Europe too, maybe a Brexit deal and potentially a vaccine to Covid as several Phase III Trials read out, that would prove more positive for this style of investing.

We believe that yesterday’s news regarding a COVID vaccine will prove to be the turning point in markets that we had been waiting for.

As the chart above highlights, Value did perform incredibly well yesterday.  Highly rated stocks fell (but in our view remain over owned and expensive), Value rallied dramatically from a low base (but remains under owned and still very cheap).  We think there is much more to go from here.  We expect this to be the start of a long-term trend in which price is again considered when valuing a business.

In our last quarterly, we also questioned the consensus regarding bond yields being lower forever and implications that a steepening yield curve would have on stocks and sectors.  As the chart below highlights, the yield curve is now the steepest it has been in almost 3 years.  This is good news for depressed financial shares but also bad news for long duration assets such as widely held and expensive technology shares.

Our fund remains cheap, trading on 14.3X 2021 PER and yields 3.8% (source: Bloomberg).  There has been no style drift and the fund remains very much in the “large Cap value” space.   We have repeatedly stated that many of our holdings are materially undervalued and despite many outsized moves yesterday, this remains the case.

We thank our investors for their patience, but believe that this is the turning point we have been waiting for.  As the chart below highlights, Value shares have a lot of catching up to do…

We would be delighted to speak with any clients who wish to discuss this further.

Graham Campbell

David Keir

November 2020