By Scott Ronalds

“It’s been a long, hard slog for [global] value stocks lately. I’d say we’re long overdue for a value recovery ...”

These words from AllianceBernstein (a global asset management firm) echo the sentiment of our global manager, Edinburgh Partners. In a recent article – A Recovery in Value Stocks is Long Overdue – Bernstein points out that the cheapest global stocks have logged some of their worst relative performances in 40 years.

In our last few Quarterly Reports, we’ve outlined some of the reasons why our Global Equity Fund has underperformed. A key explanation is the fund’s distinct value tilt, or focus on stocks with low price-to-book value ratios (P/BV) and low price-to-earnings multiples (P/E). In other words, companies that have some warts, or are more cyclical, and are trading at cheap valuations. These stocks have been out-of-favour, as global investors have been focused instead on companies with safe, predictable earnings. We expanded on this in a blog posting last month.

The current valuation spreads (discrepancies) between cheap and expensive stocks are significantly wider than normal, and Bernstein illustrates this in two convincing charts. They suggest that a value comeback is close at hand: “This disregard for valuation is atypical. Value stocks have been hands-down winners over the long term ... At some point, valuations relative to earnings power become too enticing to pass up.”

We’ve been communicating the same message for several quarters and understandably, it may be getting tiresome. Yet, the opportunity in global value stocks is compelling and we want to make sure our clients are aware of it. The Bernstein piece provides some further background on what they describe as an “enormous” value opportunity.