The widening valuation gap between growth and value offers opportunities for global equities investors. Barrow Hanley’s Brad Kinkelaar explains
• Growth/value valuation gap back at 2021 extremes
• Tech risk for markets
• Find out about Barrow Hanley’s global equities investment solutions
The valuation gap between growth and value stocks has reached extremes not seen since 2021, when growth stocks plunged 29 per cent amid a sharp investor shift away from big tech.
Growth stocks once again outperformed value over much of the past year as markets chased the artificial intelligence boom.
That drove up the share prices of Magnificent Seven tech leaders and concentrated index gains in a narrow group of stocks.
But a widening valuation gap between growth and value suggests the tech boom may be running out steam, argues Brad Kinkelaar, a senior managing director and portfolio manager at US-based value manager Barrow Hanley (part of Perpetual Group).
Investors should consider rebalancing to protect portfolios from another growth downturn, says Kinkelaar.
“2022 was an ugly year for the growth markets,” he says.
Globally, shares fell 18 per cent over the year, led by a 29 per cent dip for growth stocks.
“That’s what happens when markets get fearful. And it would not be surprising if you see that happen again.
“It’s looking today exactly like it looked four years ago in terms of valuation metrics.”
‘Trees don’t grow to the sky’
Kinkelaar says investors do not need to predict precisely when markets will shift away from their tech obsession to a more disciplined approach to valuation – but should recognise that the shift is inevitable.
“Trees don’t grow to the sky,” he says.
“We can’t predict when markets will shift – or why markets will shift.
“But DeepSeek coming out of the blue and proclaiming that they can do AI a whole lot cheaper and a whole lot better than anybody who’s spending billions of dollars – that has an impact over time.
“The fact that you’re spending $50 billion a year on AI networks doesn’t mean that you’re going to have something that’s sellable to the public. But that’s a true cost to shareholders.
“Right now, companies have been getting rewarded for spending money with the assumption that there’s a pay off somewhere down the road.
“We know for a fact that’s not always the case.”
Tug-of-war between growth and value
Kinkelaar says that despite the market’s long focus on growth stocks, Barrow Hanley’s value approach was still able to perform strongly – outperforming the world index over three years and keeping pace even during last year’s AI boom.
“When low dividend, high PE, high price-to-book stocks outperform, that’s exactly the environment that you should expect your contrarian value manager to underperform.
“What was nice for us was that when you look on a quarterly basis, the third quarter actually reversed that trend – we did have value pop up a little bit.
“Through 2024 we’ve seen a tug of war between growth and value and in that tug of war, we’re still outperforming the value benchmark and somewhat keeping up with the world benchmark.”
Valuations attractive
Importantly for value investors, Kinkelaar says the portfolio’s valuation remains attractive.
“Our portfolio continues to be cheap – and even cheaper today than it was four years ago.
“When people talk about how expensive the US market is, that’s a great observation but that’s not how our portfolios are built. We’ve stuck to our discipline. We continue to be disciplined value investors.
“Our portfolio continues to be cheap – even cheaper today than what it was four years ago.”
About Barrow Hanley
Barrow Hanley is a global leader in value investing, managing assets for clients for more than 40 years.
Barrow Hanley Global Share Fund aims to provide investors with long-term capital growth through investment in quality global shares.
Rated "Highly Recommended" by Zenith, "Highly Recommended" by Lonsec and with a Morningstar Medallist rating of "Gold", the investment team focuses on finding value in all the right places.
Barrow Hanley is distributed by Perpetual Group in Australia.