Edmund Shing:
Hello and welcome to a new podcast from BNP Paribas Wealth Management. I am Edmund Shing, Global Chief Investment Officer.
In this podcast, we are going to talk about value against growth and why we believe you should be investing in value as a factor over the next few years in the global stock market.
So, to give you some history, value as a factor that is buying low price stocks, judged by price earnings ratio or price to book or other valuation ratios, has generally outperformed both the broader market and in particular has outperformed growth stocks. If you look at the last 100 years of data from the Pharma French database, the global value premium is about 3.3% over growth stocks. So that means on average, universal global value stocks has outperformed global growth stocks by 3.3% on average per year over the last 100 years. A pretty persistent premium and really quite valuable.
However, if we look at the more recent history, particularly between 2007 and 2020, we've had actually a complete reverse of this. So, between 2007-2020, if we compare the performance of global value stocks against global growth stocks, largely driven by the performance of technology, the spread of performance has actually been -5.7%. So that means that value stocks on average have underperformed growth stocks in the world by 5.7% per year over 13 years between 2007 and 2020.
Now, from 2021, we have started to see a progressive comeback of value once again. So after this very long period where growth dominated, again largely led by the predominance of technology companies, this has now started to switch. So in the last five odd years, we've seen a 9% global value premium overgrowth. So in other words, value versus growth has outperformed on a global basis by 9% per year, and in particular, this premium is more exaggerated in Europe and Japan. In Europe, the spread between value and growth stocks has been 13% per year on average, and an enormous 19% per year on average in Japan.
So quite clearly, after a long period of underperformance between 2007-2020, we seem to be back to a period where value has been coming back into style. And I think there are clearly two major triggers for this, which have been firstly, the outbreak of war in Ukraine in 2022, which clearly led to a surge, in particular, in the price of many commodities. And you saw a return clearly of inflation on a global basis as a result of these supply chain disruptions from COVID, plus the disruptions from the war in Ukraine. And of course, now we have the current conflict in the Middle East, which is also leading to a surge in commodity prices, particularly oil and gas and related commodities such as aluminium and nitrogen fertilisers.
Now there is a precedent for this outperformance of growth and then the return of value. And the last such precedent was really in the 1990s when we saw the internet bubble leading up to the year 2000, where the Nasdaq index performed very strongly.
In fact, if we just take the two years 1998 and 1999, the Nasdaq 100 index actually went up 3.3 times. In other words, a gain of 230% performance over those two years as we saw the internet bubble really taking hold. What is perhaps more interesting is the performance following that of value, so, in other words, from the year 2000 until the end of 2007. So for a seven-year stretch, we then saw the revenge of value against growth. The Nasdaq 100 index underperformed by about 6.7% per year on average, so went down by 6.7% per year on average over those seven years, while global value stocks represented by the MSCI World Value Index went up 12.7%. So, you saw an annualised spread in performance of over 19%. So, in other words, the MSCI World Value Index outperformed the Nasdaq Tech Index by around 19+% per year for 7 years straight. And I think we're in that period today again.
Again, we've seen the resurgence of commodities, and therefore not only of the price of commodities, such as oil and gas, precious metals, industrial metals, but now we also see the resurgence of commodity producers. So clearly, within the value segment, you can count the oil and gas sector, you can also count the global mining sector, and these obviously have been performing well. But on top of that, there are other segments we would point to, which are worth investing in today if you want to reap the rewards of value outperformance, were it to continue over the next years, as we believe it will.
In regional terms, you could think about markets such as the UK or Latin American markets, which again have a relatively high content of commodity producers. In the UK, you have oil and gas producers such as BP and Shell, and mining companies such as Rio Tinto, Glencore, and BHP listed. Latin America, predominantly Mexico, Brazil, and Chile, would be a second one where valuations are low, but where you have interesting positive economic dynamics, and of course, all three of these countries are major commodity producers. If you think about Chile, you are thinking about lithium and copper. Mexico, many metals, but in particular silver. And of course, Brazil, you have oil and gas, you have sugarcane, you have iron ore, just to name a few. So, again, a very resource rich region and cheap. So, at a time like this, when we see a commodities supercycle on the up, Latin America should be a region really to benefit very much.
On the sector side, as we have mentioned, oil and gas mining, but also, think about building materials, because again, this is a sector not only is value, but has a local oligopoly. It's difficult to move heavy building materials very far, regionally speaking. And of course, if you think about the potential for reconstruction of areas such as Ukraine or even eventually the Middle East, then clearly building materials will be in great demand.
The other sector I would feature in value terms would be European banks, and clearly with the current conflict, as the markets have corrected modestly, European banks have corrected quite hard, down 15 from the highs if you look at the European banking sector performance this year. And I think that actually represents pretty good value. You still have banks that are very well capitalized, that are still going to grow earnings, that are still cheap, and of course 15% cheaper now, and are still going to pay very high dividend yields. Plus, they will buy back shares.
So if we think about value, both the regions, UK, Latin America, and sectors, again, the commodity-based sectors, but also building materials and European banks, I think there are plenty of value sectors and regions that are worth investing in today, particularly for those who are perhaps overinvested at the moment to the more growth-oriented segments of the market, notably US large-cap technology.
Thank you very much for listening to this podcast from BNP Paribas Wealth Management. Please like, share and subscribe to our series of podcasts, and for more information on our investment strategy or investment themes, please search on the web for “BNP Paribas Wealth Insights”. Thank you, and until the next time, goodbye.