Following a year of stymied activity, economic and public health signals are beginning to point to a strengthening global recovery in the second half...
Following a year of stymied activity, economic and public health signals are beginning to point to a strengthening global recovery in the second half of 2021 and into 2022. In the fourth quarter of 2020, early signs of improving economic conditions allowed the shares of value companies—cyclical, capital-intensive businesses—to outpace growth stocks for the first time in over a decade—and we believe the conditions remain tilted in favor of value.
Robert Sharps, Head of Investments and Group CIO at T. Rowe Price noted that if consumer demand continues to accelerate in the latter half of 2021, “we could experience an economic boom unlike anything we’ve seen in some time.” Recent forecasts from the Organization for Economic Cooperation and Development, he notes, suggest that global gross domestic product (GDP) could grow almost 6% in 2021, and 4%–5% in 2022.
Fig. 1: Rising Economic Growth Expectations Year-on-year real GDP growth, 2015 to 2022, as of May 31, 2021
Sources: Bloomberg Finance L.P., MSCI, T. Rowe Price analysis using data from FactSet Research Systems Inc. See additional disclosures at the end of the presentation. Source for Russell Index Data: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group"). Please see Additional Disclosures page for information about this FTSE Russell information.
Justin Thomson, Head of International Equity and Equity CIO at T. Rowe Price, recently shared that while the pace of value’s relative advantage could taper in the second half of 2021, the cyclical recovery theme “still has legs.” Earnings per share (EPS) growth estimates substantiate this belief, with the profitability of U.S. large-cap value companies expected to grow over 60% over the next two years.
Fig. 2: Earnings Growth Forecasts Have Risen Consensus estimates for EPS growth next two fiscal years vs. trailing 12 months
Sources: MSCI and FTSE/Russell (see Additional Disclosures). T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.
The difference in valuation between cheap and expensive stocks since 2002 has never been this acute (Fig. 3). Despite the recent rebound in performance for value stocks, the spread between styles remains elevated because the expensive stocks got more expensive at the same time. We believe there is room for this divergence in valuation to further mean revert. Hence, the value style could benefit from both a rebound in earnings as well as an increase in P/E multiples, both of which would likely be additive to their future returns.
Fig. 3: Valuation Spreads Between Top and Bottom Quintiles Valuation percentiles vs. past 15 years
Past performance is not a reliable indicator of future performance. June 30, 2002, to March 31, 2021. Source: Bloomberg Finance L.P. Analysis by T. Rowe Price. Definition of growth and value factors: We use the MSCI World universe as the neutral portfolio in our analysis. Value: The return differential of undervalued stocks versus overvalued stocks. The value composite is an equal‑weighted average of the market cap‑weighted factor performance of enterprise value/earnings before interest, taxes, depreciation, and amortization (EV/EBITDA); enterprise value/sales (EV/Sales); free cash flow yield (FCF Yield); price/book, and price/forward 12‑month earnings per share (EPS). Growth: The return differential of high growth stocks versus low growth stocks. The growth composite is an equal‑weighted average of the market cap‑weighted factor performance of forward two‑year EPS growth, forward two‑year sales growth, trailing 12‑month EPS growth, and trailing 12‑month sales growth.
