Summary List Placement
In 2019 and 2020, the COVID-19 pandemic sunk stock prices around the world as the global economy shut down.
These became consensus trades, however, since multiple effective vaccines were discovered at the end of last year, sending stocks — especially economically-sensitive ones — soaring. Read research from just about any market strategist at the major banks, and you’ll find they’re all bullish on the recovery trade.
But that doesn’t mean value is passé now that it’s consensus. Though the stocks have gained in the past few months, many still think they have room to run with the economic recovery still being early-cycle.
However, there are two particular markets where value stocks have the potential to be the “trades of the decade”: in emerging markets and the UK. That’s according to Rob Arnott, the founder of Research Affiliates, who counts firms like PIMCO and Invesco as clients.
Arnott has liked emerging market value stocks since 2016, but says the pandemic knocked them down again, making them ripe for returns once more.
“In mid-January 2016, when emerging markets (EM) value stocks were extraordinarily cheap, Research Affiliates identified this segment of the market as ‘the trade of the decade.’ In the first two years after the low of January 21, 2016, EM value earned 80%. RAFI EM, with a value tilt, fared even better with a gain of 85%,” Arnott said in a recent report on “the trade of the 2020s.”
“In the depths of the COVID-19 crash in March 2020, EM value again settled back to bargain-basement prices, offering investors another bite of the apple,” he added.
Investors seeking exposure to emerging-market value stocks might consider a fund like the DFA Emerging Markets Value Portfolio (DFEVX), among others.
Why Arnott is more bullish on UK value stocks
But even more than emerging market value, Arnott likes UK value stocks.
He says there are a number of tailwinds behind the stocks that add up to make them his most attractive trade. For one, there’s performance. Unlike in the US, for example, UK stocks have yet to make up losses from last March’s sell-off, and valuations remain cheap relative to the rest of the world. The FTSE 100 index is still down roughly 10% from pre-pandemic levels.
“The UK equity market stands out as trading cheaper than our last named trade of the decade — the emerging markets,” Arnott said. “Among the major equity markets, at the end of 2020, UK stocks are trading in the cheapest quintile of their historical norms based on both price-to-book and price-to-five-year average cash-flow ratios, and in the bottom third, based on price-to-five-year average sales ratio.”
The price-to-book ratio is laid out in the chart below, where the blue dots represent current values:
Then there’s the speed at which the UK is vaccinating its citizens against COVID-19, meaning a quicker recovery. More than 20% of its population has been vaccinated as of mid-February, the highest percentage in the world. The US is next at just under 11%.
UK Prime Minister Boris Johnson announced on Monday that he is aiming for a complete economic reopening by June 21.
Additionally, the Brexit trade deal reached with the European Union will help stocks to recover, Arnott said, as firms can now operate with a higher level of certainty.
“With the Brexit deal in place, much of the uncertainty around Britain’s withdrawal from the EU single market and customs union is now resolved. Thus, the Armageddon scenarios envisioned by many on the ‘remain’ side of the debate never materialized,” Arnott said.
“Notably, however, services, which account for the majority of the UK economy, were not included in the final Brexit agreement. This omission is understandably viewed by many as a distinct negative to the Brexit process, particularly as it pertains to financial services,” he continued. “But as the dust settles on the deal, many have come to believe the exclusion of the services industry will likely be a positive for the City of London.”
Arnott added that the UK’s potential admission to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) would also bode well for their economy, especially if the US were to re-join the agreement.
The iShares MSCI United Kingdom Small-Cap ETF (EWUS) is one way to gain exposure to UK value stocks.
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Originally published at https://www.businessinsider.com/investing-advice-trades-of-decade-to-make-now-rob-arnott-2021-2 on .