Value Rally to Take Hold Again?

European Value Rally Take 2?
After a decade in the doghouse, Value Equities in Europe saw a resurgence of interest last Summer, as bond yields moved higher and investors looked for ways to play the reflationary trade. Given the high correlation between European Value and U.S. 10-year treasury yields, this lead to a 6-month value rally versus growth. Then, just as investor interest was peaking – the value rally paused in January. Year to date, the Value index in Europe has delivered just half of the broad market index (MSCI Europe).

Falling Political Risk Provides the Next catalyst

This short recess does not undermine the case for considering an increase exposure to European Value. Ahead of the Dutch and French elections, investors took profits on what had been a good rally for value in the previous six months. The market-positive outcome of both elections now allows investors to re-focus on fundamentals. Falling political risk in Europe is, in our view, the trigger for the continuation of outperformance of Europe and, in particular, value areas of the European market.

Earnings Growth Providing Support
In our view, the market is undeniably fairly valued at this point, and without clear earnings growth to act as a catalyst, it will likely move sideways at best. In our view, the sustainability of any rally in Value will be predicated on better earnings growth. Value, by definition, is cyclical and finds best support through an encouraging economic backdrop and its conversion into greater earnings per share growth. Q1 earnings session is just over 50% complete in Europe and, to date, European companies have delivered the best earnings beats in 7 years. Within that number, the greatest number of earnings beats have occurred in cyclical sectors. A continuation of this trend should see a re-acceleration of the reflationary trade, and within that, the outperformance of European Value once more.

Focus on the Combination of Value and Earnings 

All that said, the quick money has been made. One of the risks to “value” investing is that investors are just looking at the “price” of the asset and not paying due consideration to the actual “value” of that company. Sometimes companies are considered “value” for a reason, because the business model is broken. To really participate in this opportunity set – savvy investors should combine “value” with earnings potential. In our view, the “sweet spot” for the next stage of value outperformance will be identifying those companies that offer significant upside (value) but can also demonstrate the ability to deliver sustainable earnings. This is more likely to be stock specific than one particular sector.

About Diego Franzin

Diego Franzin Head of Equity – Europe. Based in Dublin, he is also responsible for the European Equity Research team. Diego oversees the investment process, research function and management of all portfolios within the European and Thematic Equity universe. Prior to this, Diego was Head of Global Quantitative Research & Management, responsible for a team of quantitative research analysts dedicated to supporting fundamental research and portfolio managers to generate alpha for equity, credit and fixed income products. This team is also responsible for the management of all our quantitative and disciplined portfolios. Diego was lead portfolio manager of our US Disciplined Value and Growth products. Diego is a graduate in Economics from the University of Pavia with specialisation in econometrics and statistics. He joined Pioneer Investments in April 1998 as a Quantitative Equity Analyst and became Head of Global Quantitative Equity and Head of US Quantitative Research in 2002 before assuming the role as Head of Global Quantitative Research & Management in April 2008. Diego completed the Harvard Business School PLD5 (Program for Leadership Development) in 2008.
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